Millions of American workers are facing a tough financial dilemma when it comes to planning for retirement. Modern medical technology is allowing people to live longer and healthier lives, but the savings necessary to sustain them through their declining years is being depleted in many ways. Many workers have therefore decided to extend their careers and work into their 70s, or even 80s, in the hopes of enjoying a more financially secure retirement. In many cases, this is a very smart move. Although this idea may not seem very appealing at first, the following comparison shows that working a few extra years can make a substantial difference in how you are able to live after your working days have ended.

Example 1
Stan worked for his company for 30 years and accumulated $250,000 of retirement savings. He retired at age 65 and lived to be 90 years old. His retirement portfolio grew at a rate of 5% per year. He withdrew $25,000 each year and ran out of savings after about 14 years. Stan was forced to live on his Social Security income for the remainder of his life.

Example 2
Lydia worked for 42 years and retired at age 75. She accumulated $115,000 of retirement assets and died at age 83. Her portfolio also earned 5% per year and she withdrew $15,000 every year. The remainder of her money went to her heirs.

These illustrations show two obvious benefits to working later. The first benefit is that it allows workers more time to contribute to their retirement savings accounts, and the second benefit, is that the money will not have to last as long. If Stan in the first example was saving $7,000 a year in his retirement plan, then he could have accumulated an additional $35,000 plus any investment growth if he had worked another five years. Lydia had far less saved than Stan, but her savings outlasted her because she worked as long as she did. Working longer can therefore usually be regarded as a relatively safe means of increasing your retirement security.

Health Coverage
Another major benefit to working later is the extended healthcare coverage that you will continue to receive through your employer. The cost of health insurance premiums for the elderly can be devastating in some cases, such as where the insured has serious health problems. Employers may also offer ancillary benefits such as long-term care or critical illness coverage that can save you money on premiums. However, working longer can also help seniors to save money on healthcare costs by preventing or postponing physical and mental illnesses, as keeping a job obviously requires older workers to continue to stay active and vigilant while they work. A health and retirement study published by NBER indicated a distinct correlation between retirement and increases in depression, decreased mobility and other physical and mental afflictions.

Social Security
Private savings are not the only source of income that will increase for those who keep working. If you defer your Social Security benefits until age 70 or later, then you can expect to have to save 25% more for your retirement than if you started receiving benefits at your normal retirement age. It would often take an additional $50,000 to $100,000 of personal savings to generate a stream of income equal to the guaranteed increase that you will receive from your Old Age, Survivors And Disability Insurance (OASDI) program benefits if you postpone them for as long as possible.

Life Longevity
Another possible benefit to working later may include extended longevity and health, as your job will continue to require you to function at a higher level than you most likely will after you stop working. However, keep in mind that our grandparents typically worked well into their 60s or 70s before they retired. Our median retirement age has been somewhere around age 62 for the past few years, so we are really just reverting to the mean in some respects.

The Bottom Line

Delaying the age at which we retire may not sound fun, but it definitely has its benefits. Not only does it give us more time to build our retirement nest eggs, it also allows us to keep our health up. For more information on how working later can benefit you during retirement, consult with a financial advisor and your HR manager.

Photo Courtesy of Philip Taylor PT

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