A recent study from Boston College suggests than only about half of today’s households are ready to retire—can afford to retire—at 65. Working longer and delaying retirement to age 70 would increase that readiness to 85%, picking up an additional 35% of households.
The central readiness issue, according to the study, is that half of the households will not have enough income from savings, combined with Social Security, to maintain their standard of living. High earners, though better prepared than those with lower-income, are not immune—only 38% of high earners are financially prepared to retire at age 62.
The key effect of delaying retirement is not continuing income from working—though that certainly helps. Most have been working for decades already and have not saved enough in all that time, so unless they make significant changes, they will not make up for decades of missed savings opportunity in just a few additional years.
It also helps that by continuing to work, the potential length of retirement is shortened, cutting the number of years a retiree’s savings is needed for income. But this, as with the lengthened savings window, is not the major factor. Retirement could last another 20-30 years beyond age 70, depending on health and luck, so the few additional years spent working might not be a big time factor.
The Biggest Benefit To Delaying Retirement
The biggest advantage to retiring later is deferring Social Security benefits while continuing to work. By deferring Social Security until age 70, a retiree can increase the early benefit amount available at age 62 by up to 75%*. Since for many, Social Security will be half or more of retirement income, this increase is huge. For someone whose benefit at full retirement age (66) would be about $20,000/yr, this is an $11,000 a year increase over the early benefit at 62 of $15,000—the equivalent of a $180,000 annuity.
According to the study, not everyone in this bind might need to work 4-5 additional years. As we discuss in this blog, a sound retirement plan depends on the household ratio of savings to expenses. So depending on the ratio, some might only need to work two or three extra years, while others might need to work six or seven.
And there is more to it than simply continuing to work. Some factors that you should consider if you find yourself in this bind:
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- Do you really want to work full-time? What other things can you do to earn money while retired or semi-retired? Hobby income? Small or part-time business?
- Take a hard look at your expenses. Start re-organizing your spending and saving habits now. Every dollar you don’t spend is a buck and half before taxes you don’t have to earn.
- Start structuring your savings and investments for retirement income. It’s a very different game with different rules than accumulation. De-risk. Convert from your 401(k) to a Roth IRA if it makes sense for your tax situation. Consider annuitizing some of your savings, with a diversified annuity ladder to reduce credit and interest rate risk.
- How is your health relative to your life expectancy? This affects the decisions about deferring Social Security and annuitizing your savings.
- Ironically, if your health is good, you may incur high healthcare and long-term care costs at the end of your life from a lingering illness—and need some way to fund those. Consider longevity insurance (a deferred annuity that kicks in at 80 or 85).
- Don’t amp up risk in the market trying to make up for lost time and savings. You could make a bad situation very much worse. Instead, increase your savings and invest in a prudent, low-risk way, with a short horizon, targeted for retirement income.
Working longer may seem a simple, straightforward way out of the bind. But it may not be so simple. If you’ve kicked the can this far down the road and you haven’t been able to make it work, continuing in the same way may not resolve the issues you face. You should take a hard look at your household finances and do some serious planning. And if necessary, work with a retirement specialist who can help you sort it out.
It might make the difference between a worrisome or comfortable retirement for you and a more secure legacy for your family.
*For early claimers, SS benefits are reduced 25% at age 62 from the full amount available at full retirement age (66 in this example). In addition, for each year benefits are deferred past age 66 to age 70, they increase 8% a year, 32% total from age 66 to 70. The net increase from early claim at 62 to deferred claim at 70 is about 75%.