Delaying Retirement: A Strategic Move for Financial Security

04 Dec 2023 Delaying Retirement: A Strategic Move for Financial Security

According to recent data, the average American can expect to enjoy approximately 20 years in retirement and will spend roughly $987,000 over that time. This redefines the concept of retirement from a fixed end point to a dynamic phase of life that demands careful planning.

Gone are the days when retirement was seen as a singular event, marking the end of one’s career journey at a predetermined age. Today, with longer lifespans and a rapidly changing economic landscape, retirement is becoming more of a fluid process – a series of decisions that adapt to personal circumstances, financial situations, and even global trends.

Redefining retirement

Many Americans are considering a more gradual transition from their career, referred to as phased retirement. This approach, which can include reducing work hours or responsibilities over time, allows individuals to adapt to a new lifestyle, balancing work and leisure as they transition into full retirement. It also facilitates the transfer of knowledge and skills to younger colleagues, making it a beneficial practice for both the individual and their workplace.

Coinciding with this shift is the impact of increased life expectancies. Advances in healthcare and a greater focus on healthy living mean people are enjoying longer, more active lives. This extended lifespan necessitates more robust financial planning, as retirement funds now need to last longer. It also opens up possibilities for a second or third act in life, where post-retirement years become a time to explore new interests.

In light of these changes, retirement planning is increasingly about striking a balance between financial security and achieving personal aspirations. This balance is unique to each individual and is shaped by factors such as health, financial status, family commitments, and personal goals.

Weighing the decision: reasons to consider delaying retirement

First and foremost, it’s important to acknowledge that not everyone has the luxury of choosing their retirement age. Health concerns or the need to care for family members can make continued work untenable, necessitating an earlier retirement.

However, for those who are able, postponing retirement can be beneficial in a number of ways.

Enhancing retirement savings

One of the primary reasons for delaying retirement is the ability to contribute more to your retirement accounts or pension plan. Staying employed may also mean continued access to employer-matching contributions, effectively doubling the impact of each year’s additional savings. Moreover, after the age of 50, you become eligible for catch-up contributions, allowing you to add more to your accounts each year.

With additional contributions, employer-matching, and catch-up contributions, you can not only boost your savings but also delay drawing down your existing retirement savings, allowing those funds more time to grow.

Consider an individual who decides to delay their retirement for an additional five years. During this time, they maximize contributions to their 401(k) plan. Using 2024 figures, let’s break this down to see how much they can boost their retirement savings:

• Annual maximum contribution: for 2024, the maximum contribution limit to a 401(k) is $69,000. This includes both the employee’s and the employer’s contributions, assuming there is a matching program in place.

• Catch-up contributions: if this individual is over 50, they can make an additional catch-up contribution of $7,500 each year on top of the standard $69,000 contribution.

Given these parameters, the individual’s additional contributions in their 401(k) account over this period would be approximately $382,500. Considering a moderate rate of return, this individual could likely boost their retirement savings by more than $400,000.

Increasing Social Security benefits

Social Security benefits are computed based on the highest 35 years of earnings, increasing each year you postpone retirement until the age limit (70). Typically, your earning potential is at its peak during the final years of your career. Continuing to work allows you to replace years of lower earnings with these higher-earning years. This substitution can significantly increase your calculated average earnings.

Also, the Social Security Administration increases your benefits each year you delay claiming them beyond your full retirement age (FRA). For every year you delay retirement, up to age 70, your benefits grow about 8% per year. This increase is a permanent adjustment, meaning your higher benefit amount continues for the rest of your life.

If you’re married, delaying your retirement can also benefit your spouse, particularly if they will depend on your work record for their Social Security benefits. Spousal benefits are calculated as a percentage of the working spouse’s benefit. The longer the working spouse delays claiming Social Security, the higher the benefit for both individuals.  However, if the spouse will be claiming her/his benefit from the working spouse’s benefits, this is capped when the spouse reaches full retirement age (FRA), and in many cases, may be a reason for the working spouse to not delay receiving Social Security beyond the date the spouse attains FRA.

Here’s an example of how this can work:  the working spouse attained FRA in March, and the non-working spouse in December. Their financial planner ran the numbers if the working spouse retired but delayed the start of Social Security until age 70, which meant that the non-working spouse also had to delay until the working spouse began receiving Social Security.  The result was that the couple needed to live to age 93 to make up the difference for the years Social Security was delayed, and this did not include income that could have been received on those earnings!  This would be a different result if the non-working spouse had accumulated enough in their own account to receive a greater amount than a percentage of the working spouse’s benefits since their start of receiving benefits does not trigger the working spouse’s need to begin benefits. Additionally, in the event of the working spouse’s death, the surviving spouse is entitled to survivor benefits, which are based on the amount the working spouse was receiving.

Retaining employer benefits

Continuing to work beyond the traditional retirement age allows you to retain valuable employer-provided benefits, such as healthcare coverage and life insurance. The financial impact of these benefits is substantial, often resulting in thousands of dollars in savings.

Employer-provided healthcare is often more comprehensive and less expensive than Medicare or private insurance options available to retirees, especially when considering deductibles and out-of-pocket expenses. Likewise, employer-sponsored life insurance often provides more comprehensive coverage for less money than an independent life insurance policy, which can be exceptionally costly as you age.

Delaying Required Minimum Distributions (RMDs)

For those with tax-advantaged retirement accounts like 401(k)s or traditional IRAs, delaying retirement allows you to postpone the mandatory distributions, possibly reducing tax liability.

It’s important to note that this deferral only applies to the retirement plan of the employer for whom you’re currently working. RMDs from previous employers’ retirement accounts are still required. Also, if you own more than 5% of the business sponsoring your retirement plan, you cannot delay RMDs and must begin taking them at age 72, regardless of your employment status.

Paying off debt

Working longer offers a valuable opportunity to pay off debts, such as credit card balances, loans, or mortgages, before entering retirement. Once you retire, your income typically becomes fixed, making debt payments more burdensome. Eliminating these debts while you are still working can ease financial strain in your retirement years and allow you to allocate funds to other pursuits instead of servicing debt.

Delaying retirement can be a financially prudent choice for many, paving the way for a secure and fulfilling post-retirement life. This approach isn’t just about extending your work years; it’s about leveraging this time to significantly boost your retirement savings and maximize the benefits you receive. If you’d like to delve deeper into how this strategy might align with your personal circumstances, please contact one of our expert advisors.

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