The turbulence in the stock and real estate markets during the past five years has effectively forced many older workers to rethink their retirement plans. A large percentage of pre-retirees have seen their nest eggs decline by 25 to 50%, and that doesn't count the drop in home values. As a result, many of those facing this dilemma have decided to keep working as a means of shoring up their retirement savings.

A Sensible Alternative
For previous generations, retirement generally only lasted a few short years before death. However, longer life expectancies and corporate cutbacks have combined to lengthen retirement to 30 years or more for many Americans. The cost of fully funding a nonworking segment of one's life for that length of time can be staggering, and this expense is compounded by the uncertainty of Social Security. A recent survey by Transamerica revealed that 40% of the respondents have resigned themselves to working longer and retiring later. Another 39% said that they were going to work until at least age 70 - or for the rest of their lives. And 54% of respondents are planning to work in some capacity during retirement. Working longer clearly seems to be the preferred alternative for the majority of those who need to replenish their portfolios, and with good reason. There are two main advantages to this approach.

Increased Savings
Those who are near the end of their careers are most likely earning as much or more than they ever did before. These high earnings mean that older workers have more cash flow available to use for retirement savings contributions. The odds are also greater that they are either mostly or fully vested in their company's retirement plan.

Those who choose to continue working in order to beef up their nest eggs should seriously consider making the maximum contribution to their plans, which was $17,000 in 2012 for those under age 50 and $22,500 for those age 50 and above. After all, if they decide to keep working after their original retirement target date, then every dollar they make at that point is additional income that they hadn't initially planned on receiving. As such, it may not be much of a shock to their budgets to divert the majority of their current earnings to their retirement savings. Five years of maximum contributions for a 65-year-old would net an additional $100,000 of principal into retirement savings, plus any investment income that accumulates on that money. If the retiree doesn't want to dip into his or her principal, then he or she could probably use it to generate an additional $2,000 to $4,000 of income per year, with low to moderate investment risk.

Shorter Retirements
The other major advantage that those who work longer will realize is a reduced period of time for which they have to save. Someone who lives to age 90 and works to age 70 will not have to save as much as someone who lives to 90 and stops working 10 years sooner. Even a five year difference will have a substantial impact on the amount that must be saved in order to fund retirement.

Larry wants to retire at age 65 and he projects that he will live to be 85. He wants to draw $20,000 of retirement income each year in addition to his Social Security income, and he would like to use up all of his nest egg before he dies. If he earns 5% per year in his portfolio, he will need to have approximately $250,000 saved in order to achieve his goal.

Mabel also estimates that she will live to age 85, but she is willing to work until she turns 70. She wants the same amount of annual investment income as Larry, and is also willing to exhaust her principal. If she also earns 5% per year on her money, then she will only need about $207,000 of principal.

The Bottom Line
Delaying retirement by just a few years can pump new life into a retirement plan that has been deflated by falling stock and home prices. Delaying Social Security benefits while continuing to work can be especially effective, as long as it is feasible. You may need to be prepared to work a different job, as companies often terminate older workers in order to hire younger replacements who will work for less. For more information on whether you should work longer to help fund your retirement, consult your financial advisor.

Related Articles
  1. Savings

    Easy Ways to Go Green and Stay Budget Friendly

    Social entrepreneurs recruit "skeptics" to team green, by providing economically efficient products and services that minimize consumers' carbon footprint.
  2. Retirement

    The 5 Best Retirement Communities in Dallas, Texas

    Discover why the Dallas/Fort Worth area of Texas is a popular retirement destination, and five of the best retirement communities in the area.
  3. Professionals

    How to Protect Retirement and Help Adult Kids

    Parents can both protect their retirement money and help their adult kids. Here's how.
  4. Retirement

    10 Ways to Save Your Retirement: It's Not Too Late

    It's not too late to start saving for your retirement, even if you took longer to start thinking about it and doing something about it.
  5. Retirement

    5 Ways to Use Your Home to Retire

    Retirement is going to cost a lot, and for homeowners who face a shortfall, their home can be a source of income. From downsizing to renting, here's how.
  6. Mutual Funds & ETFs

    Mutual Funds Millennials Should Avoid

    Find out what kinds of mutual funds are unsuitable for millennial investors, especially when included in millennial retirement accounts.
  7. Retirement

    Retire on 70% of Your Income? Why It's Not Enough

    Many people think 70% will be enough to support them in retirement, but they forget a few significant expenses that could lurk in the future.
  8. Retirement

    This Is How You Could Live in Costa Rica for $1,000 a Month

    Explore the cost of living in Costa Rica, and learn how you could sustain a nice middle-class lifestyle for yourself on about $1,000 a month.
  9. Professionals

    Why Women Are Underprepared for a Spouse’s Death

    Women are typically less prepared for the death of a spouse than men. An advisor can help mitigate some of the financial burdens widows may end up facing.
  10. Retirement

    How Robo-Advisors Can Help You and Your Portfolio

    Robo-advisors can add a layer of affordable help and insight to most people's portfolio management efforts, especially as the market continues to mature.
  1. What are the main kinds of annuities?

    There are two broad categories of annuity: fixed and variable. These categories refer to the manner in which the investment ... Read Full Answer >>
  2. What are the risks of rolling my 401(k) into an annuity?

    Though the appeal of having guaranteed income after retirement is undeniable, there are actually a number of risks to consider ... Read Full Answer >>
  3. How do I get out of my annuity and transfer to a new one?

    If you decide your current annuity is not for you, there is nothing stopping you from transferring your investment to a new ... Read Full Answer >>
  4. How can I determine if a longevity annuity is right for me?

    A longevity annuity may be right for an individual if, based on his current health and a family history of longevity, he ... Read Full Answer >>
  5. How does a Roth IRA grow over time?

    Your Roth IRA account grows over time thanks to two funding sources: contributions and earnings. While your contributions ... Read Full Answer >>
  6. Can mutual funds outperform savings accounts?

    A mutual fund can – and should – outperform a savings account. In most cases, it should not even be a close race. Savings ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!