Delaying Retirement by Several Months Can Significantly Improve Your Standard of Living
We are all familiar with the power of compound interest when it comes to saving for retirement: the earlier you start, the less you will have to save each month thanks to the accrued interest. But a recent study by the National Bureau of Economic Research found that there is hope for people in the final stages of their careers. In fact, the report concludes that working one year longer than you planned can lead to a larger increase in retirement income than accumulating an additional percentage point of your salary over 30 years.
The study looked at how savings over 30 years stack up against deferred retirement for the primary breadwinner in a couple who start saving at 36. It is assumed that the breadwinner contributes six percent of his salary to the 401 (k) with the company matching three percent (nine percent total).
Delaying retirement a little has three benefits: you don’t spend your savings; you (probably) keep saving and delaying getting Social Security. The greatest benefits come from delaying the payment of social security benefits.
“A 66-year-old worker who works a year longer and requires social security a year later sees his inflation-adjusted retirement income increase by 7.75%, 83% of which is attributable to an increase in social security benefits,” says in the report. …
But you don’t need to spend an extra year working. Even a three to six month delay in retirement “increases retirement income by the same amount as increases pension contributions by one percentage point in 30 years of work.” One extra month at the end of your career can lead to the same increase in retirement income as adding one percentage point of savings over 10 years.
The authors ran the scenario for different income levels and rates of return and found that longer employment is invariably the most effective way to increase retirement income. This means that if you are playing catch-up with your retirement savings, a delay of even a few months can lead to a much better standard of living.
The report found that the social security effect is “very progressive,” meaning that the lower your income, the greater your benefit gain. “The lower wage worker only needs to work 2.1 months longer to benefit from 30 years of additional percentage point savings, while the higher wage worker needs to work 4.4 months longer to get the same benefit, ”the report says.
Another study by the Stanford Longevity Center found that delaying the application up to 70 years maximizes the benefits. You can claim benefits from age 62, but the full retirement age is 66 for people born between 1943 and 1954, and up to 67 for people born later. If you wait until you turn 70, your benefits increase by eight percent each year.