How Delaying Retirement – Even by a Few Months – Can Help Erase a Savings Shortfall

I’ve made my fair share of investment blunders, such as buying individual stocks at high prices and panic selling them at low prices. I’ve also sat on cash for long periods of time because I was scared to put it in the market, and I’ve been hit with extra taxes when selling bonds because I didn’t understand the rules.

I try to learn a lesson from each mistake and I generally stay on the right path. But, in part because I’ve had so many stumbles, I am sometimes tempted by strategies that can help me “catch up.” I’m embarrassed to say I actually lost a bit of sleep during the great bitcoin rally of 2017 because I thought I was missing out on a way to erase some of my earlier mistakes (I’m glad I dodged that bullet).

Lately, I’ve been pondering a way to pad my retirement account that doesn’t require getting incredibly lucky, learning a new skill, networking, or going back to school. The forehead slapping, lightbulb moment? I realized I can just work a little longer than I’d planned.

Maybe you’re thinking, “Well, duh.” If so, I applaud you. But I had never considered the implications of working longer; I was more focused on asset allocation strategies and plotting for early retirement. It wasn’t until recently that I actually took a look at the math and learned the true power of working longer — even if “longer” just means delaying retirement by one extra month.

The Math Behind Working Longer

A recent paper by the National Bureau of Economic Research found that, for the average person, “delaying retirement by 3-6 months has the same impact on the retirement standard of living as saving an additional one-percentage point of labor earnings for 30 years.”

If that wasn’t mind-blowing enough, they also conclude that “increasing retirement saving by one percentage point 10 years before retirement has the same impact on the sustainable retirement standard of living as working a single month longer.”

In layman’s terms, that means working just a little longer than you anticipated can make up for quite a bit in savings shortfalls over the course of your career. In understated fashion, the authors conclude that “working longer is relatively powerful compared with saving more for most people.” I’d say.

Why is working longer such a boon? The authors offer up a few key reasons — for one thing, the longer you’re earning money, the less time you’ll be drawing down your savings. But the biggest driver by far is the way Social Security benefits are paid out.

The authors found that “83 percent of the impact of delaying retirement comes from additional Social Security benefits.” That’s because the longer you work, the bigger your payout from Social Security will be. Though many of my millennial peers are worried about the health of the Social Security program, that doesn’t mean we should be cavalier about how beneficial it can be.

Let’s walk through a hypothetical scenario using the quick calculator at SSA.gov to drive home the point. If you’re age 62 and earning $60,000 per year, and you start collecting Social Security now (as soon as you’re eligible), you could expect a payout of about $1,253 a month, or about $15,000 per year.

But if you were to stick around the workforce, making the same salary, for two more years – until you’re 64 – you’d receive $1,503 a month, or about $18,000 a year. (That’s in 2018 dollars; the actual payout would be even higher, since the SSA adjusts payouts for inflation using the U.S. Consumer Price Index, so recipients maintain purchasing power even as prices rise.) That extra $3,000 adds up year after year, and it would take quite an investment return on your existing savings to give you an equivalent payout.

And if you kept working until full retirement age before you started collecting benefits? You’d receive $1,697 a month in 2018 dollars, or an extra $5,300 every year. Hold off ’til age 70, and you’d get $2,308 a month, or nearly double the age 62 benefit.

To be clear, you don’t have to make a high salary to reap the benefits of an extra year of work. The authors made sure that their study covered a large range of income distributions and found that their results hold across “a wide range of realized rates of returns on saving, for households with different income levels, and for singles as well as married couples.”

In fact, the impact of working longer is even greater if you have a lower salary, as low earners stand to receive a higher percentage of their overall income from Social Security. Thus, boosting their Social Security payouts will have a disproportionately larger positive effect.

If you’re still not convinced, there’s another paper by the same authors that really drives home the point. They did a deep dive into all things Social Security, with a focus on just how impactful delaying payments can be. They found that claiming Social Security too early could end up being a $250,000 mistake over the course of retirement. When one third of Americans start taking Social Security benefits the moment they’re able to, that amounts to a lot of money left on the table.

Finally, while it’s noble to try to increase your savings rate toward the end of your working career, it’s still unlikely to be as powerful as working longer. As the authors put it, “the relative power of saving more is even lower if the decision to increase saving is made later in the work life.” You just don’t have as much time to benefit from the compound interest of those changes when you start late.

Again, this is especially true for low earners. If you make $22,000 per year, delaying retirement by a measly three weeks has the same effect as saving an additional 1 percent of your earnings for 10 years.

Challenges to Delaying Retirement

Not everyone has a choice in how long they work. Companies shut down, family members get ill, people get laid off… life throws us curveballs. Also, ageism is real and pernicious, especially for women. That bias can make it difficult to switch jobs while approaching a traditional retirement age.

And what about the people who really hate their jobs? They might get such a boost in overall well being from collecting Social Security as soon as possible that any potential gains from working longer pale in comparison. And calling it quits early on a physically demanding or dangerous job could potentially save you from a costly injury.

Finally, there’s the question of physical health. You can have every intention of working into your 70s, but your health might not allow it. In fact, some people take early Social Security benefits precisely because their health is failing. You can’t blame them for doing so under those circumstances, but it’s an unfortunate and financially unfavorable choice.

All these factors elucidate why most of us are on The Simple Dollar in the first place. If we learn to live frugally, decrease stress, and eat healthy, then hopefully we can live a fulfilling life that allows us the flexibility to keep working should we feel it necessary. We can’t all be Betty White, who’s pushing 97 and has no plans to stop working, but hopefully we can work well into our sixties should we choose to.

Summing Up

When it comes to building wealth, it’s a natural instinct to want to make up for lost ground. The key is to figure out ways to do so that are practical and sustainable. That’s why I was so excited to learn how powerful it can be to work longer. We’re not talking decades, here. Even one extra year of working can help you mop up some serious messes.

As someone who spends too much time immersed in the FIRE (Financial Independence, Retire Early) community online, I feel a pull to leave my primary job as soon as possible. Quitting, or “FIREing,” is a badge of honor. No one gets Reddit upvotes for working an extra year. But, sometimes sticking it out at your job for a few years longer than you planned is the best possible option to meet your financial goals.

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