As you contemplate your future, does it feel like a perpetual journey of work lies ahead? If so, you’re among many grappling with the daunting prospect of retirement.
Yet, there might be a silver lining. Recent research suggests that a modest extension of your working years could significantly alter your retirement outlook and quality of life.
A study conducted by the National Bureau of Economic Research (NBER) revealed that delaying retirement by just a few months can yield substantial benefits. According to the study, “working three to six months longer boosts retirement income as much as increasing retirement contributions by one percentage point over 30 years of employment.”
In practical terms, transitioning from retirement at age 66 to age 67 can amplify retirement income by 7.75%. By comparison, elevating retirement savings contributions by one percentage point from age 36 onwards, maintained for three decades, would enhance retirement income by just over 2%.
These findings hold true for both single individuals and primary earners in married households across diverse income brackets.
This isn’t to undermine the importance of bolstering savings. Rather, it underscores that among the two primary strategies for individuals lagging behind in retirement planning—increasing savings or prolonging employment—the latter is likely to yield greater returns.
The Benefits of Postponing Retirement
Researchers have highlighted four advantages associated with delaying retirement. Firstly, each extra month of work presents an opportunity to increase savings in a retirement account. Secondly, it allows more time for the account balance to grow. Thirdly, postponing retirement can lead to higher benefits or lower costs if purchasing an annuity.
Most significantly, delaying retirement boosts Social Security benefits. The earliest age to claim benefits is 62, while the latest is 70. Every month postponed between these ages increases the monthly benefit.
You can assess your estimated Social Security benefits by creating an account on the SSA website. This reveals the considerable differences in benefits at ages 62, full retirement age (67 for those born in 1960 or later), and 70. For instance, delaying until 70 could nearly double the benefit compared to claiming at 62.
Once aware of your full retirement age benefit, you can calculate month-to-month or year-to-year variations in benefits using the SSA’s calculator. For example, delaying benefits from 66 to 67 could yield a 6.5% increase, resulting in $2,750 per month compared to $2,582.
To compare this with saving more, consider the “4 percent rule,” advising withdrawals of no more than 4 percent annually from retirement savings to ensure longevity. To match a $2,016 yearly increase in retirement income, an individual earning $80,000 annually at age 56 would need to contribute an additional 4.3 percent of salary monthly ($289.50) to their workplace retirement plan, achieving a 7 percent average annual return over 10 years.
Additional Advantages of Postponing Retirement
- Employer Matches on Retirement Contributions
If your employer matches a portion of your contributions to the workplace retirement plan, this presents a valuable opportunity. Continuing to leverage this benefit allows your nest egg to grow significantly over time.
- Extended Group Health Insurance Coverage
Medicare eligibility typically begins at age 65, meaning early retirement could necessitate seeking alternative, potentially costly health coverage. Conversely, staying employed past 65 may enable you to maintain group health insurance, often offering more comprehensive coverage than Medicare.
If you’re in this situation, it’s essential to consult your benefits department regarding your current health insurance’s compatibility with Medicare. Depending on your company’s size, coordination of claims payment between the two insurance plans may vary, necessitating careful consideration.
3. Increased Employer-Sponsored Educational Opportunities
Employer-provided training and education, whether through tuition reimbursement for college courses or in-house workshops, are valuable perks. For those intending to engage in part-time work post-full-time employment, acquiring new skills at no personal cost can be immensely beneficial.
If you’re lagging behind in retirement planning, it’s reassuring to recognize that working indefinitely isn’t necessarily the solution to securing future financial needs. Even minor postponements in retirement can yield significant improvements. When considering the additional advantages of extending your career, you may find yourself in a more favorable position than anticipated.
