If you spent your childhood in the 1960s, you may have grown up with the assumption that you would work until you turned 60 or 65, receive your Medicare card, and then spend your golden years living off your nest egg. Fast forward to present day, this assumption might as well seem like a far-fetch dream as you face your current reality. If you haven’t been taking advantage of compounding interest in your younger years, you may have to rethink your retirement plans and delay your retirement.
Delaying your retirement, although it is a hard realization for some, is a financially sustainable decision. When you start to rely on your retirement accounts to help cover your daily expenses, you will be glad that you’ve had a few more years to let your accounts grow and extend your retirement income. Delaying your retirement is not as uncommon as you think. With the SECURE Act, many people are realizing that there are opportunities that they can take advantage of. The law allows them to continue to contribute to their accounts as long as they are still working, delay their withdrawals to the age of 72, and have employer-sponsored benefits as long as they meet certain working requirements.
According to the Bureau of Labor Statistics, the ratio of persons aged 65 and over that are still working has risen from approximately 12 percent in the mid-1990s to nearly 20 percent in 2015 and 2016. Considering that the average U.S. lifespan has risen (from 70 in 1965 to about 78 in 2017) along with the cost of living, this isn’t so shocking. For most Americans, having enough money to cover healthcare costs and maintain the same standard of living in the senior years is hard.
But before you sigh—and envision yourself working round the clock into your later years— you should know that delaying retirement has a lot of benefits, from saving money to feeling financially secure and stress-free. Also, with the extra savings, this can lead to some self-deserved vacations or purchases you’ve earned for delaying your retirement.
Why Delaying Retirement is Smart
According to current data from the U.S. Census, the average retirement age is 63. But for many people, that number will sound too low. According to Northwest Mutual’s 2019 Planning & Progress Study, 46 percent of Americans surveyed said they expect to work past age 65. For those who plan to work past age 65, 53 percent say it is by choice while the other 47 percent say it’s out of necessity.
“The general rule is that we would like to see people be able to replace 75 percent to 85 percent of their pre-retirement income,” says David Blaylock, CFP and Kindur’s Retirement Advisor. “This could include withdrawals from their investment accounts, part-time income, social security benefits, or other passive sources of income such as rental properties.”
Given this rule, there are several reasons why you may want to delay retirement past age 65:
- You will get higher retirement benefits. If you elect to take Social Security benefits at age 70, you’ll get 132% more than taking it at age 66. If you continue to work, you are allowing extra time to contribute to your accounts and letting them grow because you’re not accessing these funds.
- Your cost of living is high. If you live in a city like New York, you may have higher living expenses than you would in Tampa. To continue to live comfortably, you can reduce your living expenses by downsizing or moving to a nearby area where the cost of living is more affordable. If you want to take a radically different approach, you may want to consider moving to a state that does not have an income tax. Therefore, you can save more for your retirement during your working years.
- You don’t have enough money saved. When you determine whether you’ll have enough to live off of in your 70s and beyond (e.g., $75,000 per year for 20 years), you also have to account for unexpected expenses or emergencies. In addition, we recommend that you have at least two to three years’ worth of expenses in cash or cash equivalent. If you’re not there, you should continue to build these funds to cover unexpected expenses you may encounter in retirement.
- You have the option to continue working. If this option is available to you, you may want to take advantage of continuing to work to grow your retirement account and have employer healthcare benefits. If this is not an option, discuss with your employer to see if you can have reduced hours or consult part-time as you transition into retirement.
- You need to account for healthcare expenses. Health issues kick into high gear for most individuals in as they approach and enter retirement. With rising healthcare insurance premiums, deductibles, and out-of-pocket expenses, you may be shelling out more cash for unexpected surgeries and other medical treatments. If you have a partner that’s still working, you may be able to be covered by your partner’s employer’s plan. However, if that’s not an option, you should continue to build your cash reserves and find healthcare coverage like medicare to help alleviate those costs.
- You want to help with your children’s expenses. You’re still responsible for taking care of your children, or even grandchildren, because they are young and not financially dependent yet. Between raising a child and paying off student loans, younger generations are increasingly relying on their parents for help. Incidentally, about 1 in 3 parents intend to foot the bill for their kids’ college education, according to one survey. If you plan to help your children, then you would need to account for these extra expenses in addition to your current expenses. Hopefully, you’re leading an example to your children and grandchildren the importance of saving for retirement by delaying your own retirement.
- You haven’t planned enough. Lack of planning — not knowing what you will need, or how to obtain it — could mean you will fall short of your projected needs. Thus, planning sufficiently can help prepare you for retirement. By understanding what your financial outlook is today, it will help you know what steps you’d need to take for your future retirement goals. There are many online resources and tools available at your fingertips like our “Weather the storm” goal. It automatically projects your future financial outlook based on the actions you take like delaying your retirement, electing your Social Security, and/or reducing your expenses.
Delaying with Grace
Once you’ve decided that it makes more sense to delay retirement, how do you know the right age to retire?
Here are four considerations for figuring it out:
- Your current financial situation. If you continue to save at your current rate, will you have enough money by age 65 to cover up to 25 more years of projected living expenses? And is it possible to save more? Assessing what you need is the first step toward figuring out the most appropriate retirement age.
- Your future needs and wants. Obviously health and housing are critical needs and comprise the bulk of post-retirement expenses. But are there bucket list items you’ll want to accomplish before you turn 80 — such as spending a month in Bali? If you retire too early, you might not have enough money for that $10,000 trip you’ve always wanted to take.
- How prepared you are for the unexpected. “The need for emergency savings does not change during your retirement years,” says Blaylock. “We recommend that they always have access to 6 months worth of monthly expenses. If one spouse is still working this can be lowered to three months. If they are uncomfortable having this much cash in a low-yield savings account, they can also consider a HELOC if they have home equity that can act as a buffer for emergency expenses.”
- Your job joy. Are you happy in your career or job? If so, pushing your retirement to age 70, and then opting for a phased retirement or scaling back to part-time might make more sense than outright quitting. “Phased retirement for many people is a great transition,” says Blaylock. “For most of us, our usefulness to an employer does not end in our early 60s. Part-time work can be fulfilling and can reduce the stress of withdrawals on investment portfolios. The key is finding part-time work that is meaningful or fulfilling. This could look like changing job fields or taking on a position that has less responsibility. Flexibility can also be a very important trait for part-time work, especially in your later years.”
Regardless of what age you choose to retire, it’s important to remember that no two individuals’ retirements are alike. By strategically planning and securing your future retirement income, this can help you figure out an end date and make the choice that is right for you and your situation.