Delaying Your Retirement: What a Difference Three Years Makes!

Last Updated May 7, 2010 9:50 AM EDT

There are powerful advantages to delaying your retirement just for a short period, say, three years or so. Here are just four of those advantages:
  • Social Security benefits increase for each year you delay commencement of benefits (up to age 70).
  • Your retirement investments have three more years to grow and provide more income.
  • You're drawing down your investments for three less years.
  • If you participate in a traditional pension plan, your benefits can grow with additional service.
Despite the advantages, most people underestimate the impact of delaying their retirement, as shown in a recent report from the Society of Actuaries entitled 2009 Risks and Process of Retirement Survey. In this survey, only 14 percent of respondents said that delaying their retirement for three years would increase their financial security by a lot.

Let's look at one example that "does the math" so you can see just how downshifting and delaying your retirement can help.

Joe Hardworker makes $75,000 per year, is currently age 59, and is single. He's already put in 22 years at his job, and he just can't wait to retire at age 62, so he can hike, fish, and generally take it easy. He recently attended a retirement planning seminar and heard about the possible financial advantages of delaying retirement, but he doesn't like the thought of working full time until age 65. One of his older friends, however, recently cut back to a half-time schedule at age 62 and loves it. When Joe thinks about it, a half-time schedule would still allow him plenty of free time for hiking and fishing, so he figures it will be worth the time to investigate how this strategy could improve his financial situation.

He starts by estimating the total annual income he'd have if he retires at age 62, considering both his pension plan at work and his Social Security income. Here's how his calculations look:

Pension: $15,938 per year, reflecting an early retirement reduction of 5% per year before age 65

Social Security: $17,640 per year, according to the Social Security's website, www.ssa.gov
Total: $33,578 per year

His next goal is to estimate the total amount of income he'll receive over the rest of his life, considering his life expectancy. He starts by visiting www.livingto100.com, answers questions about his family history and lifestyle, and finds out that he could live 21 more years after age 62, until age 83. So his total estimated lifetime earnings look like this:

21 years of retirement times $33,578 per year = $705,138

But Joe understands that this isn't quite accurate, since Social Security increases for inflation each year. For this purpose, however, Joe wants to keep it simple and he ignores the potential cost-of-living increase.

Next he estimates his annual retirement income if he works half-time from age 62 to age 65, and then retires full-time at age 65. Here's how his calculations look:

Pension: $21,000 per year, reflecting no reduction for early retirement

Social Security: $22,200 per year, a significant increase, all because he delays starting benefits

Total: $43,200 per year

And here's the new estimate of the total amount of income he'll receive over the rest of his life, considering he'll have 18 years of retirement from age 65 to age 83:

18 years of retirement times $43,200 per year = $777,600

3 years of half-pay salary times $37,500 = $112,500
Total lifetime income: $890,100

Note that with just his pension and Social Security income alone, Joe is ahead by $72,462 ($777,600 minus $705,138). When he counts his extra three years of salary, however, he's ahead by $184,962!

And it can get even better. When Joe uses www.livingto100.com to estimate his life expectancy, it gives him tips about nutrition, exercise and lifestyle that could improve his life expectancy by as much as five years. So he runs the numbers again, assuming he'll live until age 88 instead of age 83. Now the total amount of income he'll receive over the rest of his life is higher by more than $233,000 if he works half time from age 62 to 65, compared to starting his benefits at age 62!

Joe also realizes that the contributions for his medical insurance premiums as a retiree are higher before age 65 compared to his contributions as an employee. In addition, he can let his 401(k) balances grow for three more years, giving them time to recover from recent market losses. Now the half-time work idea seems like a no-brainer! And he does like the thought of easing out slowly and mentoring his replacements. Joe resolves to look for the right time to discuss these ideas with his supervisor.

This example illustrates a good reason to Do the Downshift. If you're in your fifties or sixties, you could be alive for another 30 to 40 years. It takes a boatload of money to be fully retired this long. Delaying full retirement just for a few years can make a significant difference in your financial security.

P.S. Does working later sound like a drag? Here's an inspiring story about Jack Borden, a 101-year-old attorney who is still working. "When the gals come into the office and I've got my head down on the desk, and I ain't moving, then that's when I'll retire," he says.

Image from iStockphoto contributor Sportstock
  • Steve Vernon On Twitter»

    View all articles by Steve Vernon on CBS MoneyWatch»
    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.

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