Smart SpendingSmart Spending

Should you delay your retirement?

Deferring retirement by just 5 years can raise your monthly retirement income by as much as 40%.

By MSN Money Partner Apr 9, 2012 4:42PM

This post comes from Phil Moeller at partner siteU.S. News & World Report.


Delaying retirement has been one of the most consistent pieces of financial advice for older Americans reeling from the recession. The major financial benefits of deferring retirement are the ability to continue earning money, adding to your retirement assets, deferring drawing down those assets, and delaying the date you begin to receive Social Security benefits.


Image: Senior with Laptop © H-Gall/Vetta/Getty ImagesSituations differ, of course, but here's a rough look at the impact of deferring retirement for five years, from age 65 to 70. Use this finding to see how your own situation would be affected if you were to delay your own retirement.


The assumptions of such an exercise are crucial. My hypothetical 65-year-old earns $50,000 a year, which is also the figure we'll use to calculate the person's Social Security payments. The person also contributes $3,000 a year to a 401k, and the employer matches half of that, or $1,500. The person has a nest egg of $250,000 when he or she turns 65. I am making no assumptions about how a five-year retirement delay affects housing or health care expenses.


Lastly, there is no inflation component built into these assumptions. I don't think this will throw off the numbers too much. Social Security, of course, already has an annual cost of living adjustment, although there's a good chance the formula will be made less attractive in the near future. It's one of the most popular suggestions for reducing the program's long-term financial stress. Also, the investment returns used here are already adjusted for inflation.


Anthony Webb, a research economist at the Center for Retirement Research at Boston College, provided the key numbers used in this exercise. The Center has loads of solid retirement research and advice that can help people who are concerned about their retirement security.


Someone who is 65 today will collect 100% of her full retirement benefits when she turns 66 and reaches full retirement age. I wish Social Security would update this misleading phrase because your annual benefits actually increase -- by a lot -- for every year you delay benefits until your 70th birthday. (Post continues below.)

You get 100% of your average indexed monthly earnings if you begin receiving benefits at full retirement, but only 93% of this amount if you begin taking Social Security at age 65. However, if you delay Social Security until your 70th birthday, you will collect 132% of your average indexed monthly earnings. That's nearly 42% more every month for the rest of your life. That's an enormous gain -- 8% a year plus inflation adjustments.


In fact, it may make sense for some people to spend some of their savings if it helps them delay claiming Social Security. With interest rates so low today, who wouldn't want a guaranteed annuity whose lifetime monthly payout rises by 8% a year for the next five years?


I've heard the arguments about the costs of those "lost" years of benefits. And for those in poor health or with family histories of shortened lives, delaying benefits may not make sense. But for others, particularly those in good physical and mental shape, the odds of living into your 90s makes a persuasive argument for collecting 40% more in benefits for 20 to 30 years.


Webb has done the math to show what this delay means. We're assuming that your $50,000 salary is used to set your average indexed monthly earnings. (That's a drawback of using simple assumptions.) You will get a monthly Social Security payment of $1,659 if you begin benefits when you turn 65. If you wait until age 70, your monthly payment will be $2,346. That's $687 more each month and $8,244 more every year, for the rest of your life.


There's also a chance that your annual salary in the next five years will be higher than in some of your earlier earnings years. This would raise your earnings base and entitle you to still higher Social Security payments when you finally begin receiving them. To find out your own Social Security benefits, you can use the agency's online Retirement Estimator.


The second big benefit is that instead of spending down some of your $250,000 nest egg, you'll see it increase by $4,500 a year plus the annual earnings of your investments. Webb says a reasonable assumption for real (inflation-adjusted) investment gains would be 4.6% a year. If you apply that to your savings and factor in the added 401k contributions, your nest egg at age 70 would have grown by nearly 30%, to $320,000 from $250,000.

Not only is this more money, but it has to last five fewer years because of your decision to keep working. How much to pull down from these funds each year is a key question. How long do you think you might live? Do you want to plan to spend down your assets to zero or leave something for heirs?


If you turned your nest egg into a lifetime annuity for you and your spouse, Webb says, the monthly income it would produce would rise from $910 on $250,000 today to $1,339 a month on $320,000. That's $429 more a month, or $5,148 a year.


Together with your higher Social Security, your annual income in retirement will have increased by $13,392 every year for the rest of your life. If you want to factor in a five-year shortening of retirement and spend more of your nest egg each year, your annual income would be even more. Taxes will certainly take a hefty chunk of these higher earnings. But the gains might make the difference between 25 more years that are stressful and 20 years that are enjoyable.


More on U.S. News & World Report and MSN Money:

Apr 18, 2012 1:25PM




Apr 18, 2012 12:54PM
Delay Retirement? And written by banker scum! Excuse me but 57 I am completely pissed off because of this new beginning of the industrial age attitude. My Father Retired at 55 as was the deal, However Lying rethug politicians have raped the system to make their rich buddies richer and now its 62 for me thats goddamned delay too much already. The banking and wall street scum that is behind the pooring of America are traitors to humanity and should be hunted down and hung in trees
Apr 18, 2012 2:05PM
  Retire as soon as possible, I did at 56 yrs. old with a 36 1/2 yr. carreer with a power company as a lineman, best choice I ever made.  you have to judge for your self, health, physical ability, family life exspectantcy,  70,80,90,100? or do you just want to work forever. Enjoy retirement, I highly recommend it!!
Apr 18, 2012 3:31PM
Unfortunately none of us know how long we are going to live. I'm ready to retire at 62 and enjoy life. I haven't lived the "high" life thus far and my home is paid off. I don't have credit card debt and don't plan on leaving my children money for them to blow after I'm dead. I'll just enjoy living on the farm with a little less money and count my blessings each day I see the sun rise.  I don't need a cabin in the mountains or a house at the beach to make me happy. I love life and I'm sure I'll love retirement.
Apr 18, 2012 1:39PM
Should you? More and more that decision is being taken out of the hands of the person. I did, I retired at 63 and it was definitely the right decision for me. I have real estate investments to take care of and they provide me with enough income to enjoy the things that I want to do....It feels great to get up in the morning and make that decision about what I want to do today...I can work, or I can go somewhere of my choice....or, I can read or do nothing at all if I choose....I never could understand the people who just retire and then have a day to day empty lonely uneventful life. I also dont quite understand those who take great pride in going to the office every day at age 90....They just dont have enough imagination...
Apr 18, 2012 3:08PM
Like you have a choice! Try to find a job if your laid off at 55+
Apr 24, 2012 4:43AM
Waiting until 70 to retire takes jobs away from the young.  Work, but if you don't have your own business, retire.  If you need to work part time, fine.  But that job market is mighty scarce.  Tighten the belt and let room be made for your children and grandchildren.  I am all for retiring early, living on less and enjoying what the rest of life offers. l  We're still useful, but we then can take the time to enjoy the beauty that surrounds us.
Apr 18, 2012 3:24PM

Why not reduce the age of full retirement from SS to 62?


This would open up more jobs for the unemployed, would it not?

Apr 18, 2012 4:02PM
My own plan is to retire at 55.  At that point the house will be paid off and the kids out of the house.  My wife is 6yrs younger so we'll live for that time off her salary.  Then we'll live off my 401K until I can collect SS at 62, then wife's pension kicks in a few years later.  It all doesn't add up to a huge pile of cash but being somewhat diversified, I feel like we won't wind up destitute.  I'd rather live on a strict budget in retirement than spend my time at a job I'm not that fond of.  I should add that I'm not averse to a part-time job doing something easy or enjoyable.

I will need only a small fraction of what my salary is now to retire on.  House will be paid for, kids will be long gone, get rid of one of the vehicles, grow most of my own food.  62 and a wake up for me, and you can count me out of the work force.

Apr 18, 2012 4:14PM
Get the **** out of the job market as soon as you can unless you love your job. Otherwise, the job stress & **** will take more years & money  off your life than you gain. Screw the American Treadmill!
Apr 24, 2012 9:59AM

"earthlinked" nailed this one right on the button. It's really not about working until you're 70. Most of us will not be healthy enough to perform at an adequate level even in our late 60's. I've been in the same industry for 25 years and have seen many retire and unfortunately pass away within a year or two. The reality is this: If the goverment would not have taken from the SS fund in the past, no one would have to work past 60 unless they desired to do so. The rammifications are profound and now we are all going to pay for the mistakes of the past. Pension plans are almost non existant, 401k plans are subject to the stock market, which is completely unpredictable and unstable, and now we are asked to delay drawing SS past our retirement age. Unless you have been extremely frugal and had some success with your 401k, you will be forced to work well in to your retirement years.

Our country just has way too many entitlement programs and spends too much money on sytems that don't work. This has to change in order to provide for the folks that spent their lives working for a living. We are giving way too much to those that don't deserve it and not providing for those who earned it!

Americans should not be forced to work in to their retirement years unless they choose to do so.

Apr 18, 2012 1:39PM

some of these articles are exceptionally disappointing.


Apr 18, 2012 2:19PM
Well, if you're making $50,000 a year or more maybe delaying retirement makes sense.  However, if you're making $13,000 or less go ahead and retire at 62.  You'll probably get more money from your SS than you would from a partial-time, minimum wage job.  I know I will.  And you could still work one part-time job instead of two and survive much better.
Apr 18, 2012 4:21PM
These articles are such BS!  To begin with, how long will you live?  That is the question that every person has to answer, before applying for retirement.  I don't expect to live beyond 70, so what's the point in waiting?  I don't have a 401k, don't have a pension, and just have my SS and the meager savings (thanks to the crash).  $50K?  I don't even make $20K, so this stuff is all just a joke for me.
Apr 24, 2012 9:22AM

Work until age 70?


How many working people do you suppose would be capable of keeping up the pace of their full-time jobs at that age?  Not to mention a brain that stays just as sharp as a young person's?  Some can, of course, but everyone?  I've spent time around 70-year olds, so I know better.


And what would this do to the already pitiful job market for our up and coming young people who need good jobs?


The solution is simple:  Let the government start funding itself adequately and stop "borrowing" from the Social Security fund (it has borrowed trillions).  Adquate funding starts with our immediate withdrawal from the black holes of Iraq and Afghanistan, and future funding is ensured by ending the status quo of basing our economy on the pursuit of war and by reform of our tax system such that loopholes for the wealthy are eliminated and these folks once again start paying their fair share.


Under our present system, with the disappearance of pension plans (401k's are not pension plans), there is no longer any such thing as an adequately funded retirement, unless you happen to be one of our privileged 1%.  This is an outrage.  Every government should in some manner ensure a decent support system for its elderly, especially in a country as wealthy as this one.


There is an unspoken agenda going on here:  Working Americans are being pushed to work until the grave. 


The question is whether Americans will force their government to get its priorities straight.

Apr 24, 2012 8:03AM
Hmmm... Collect SS at age 66 or wait four years until age 70 and collect 30% more per year?  That is the question.  By my calculations, the break even point would be age 82.  So if I live to be significantly older than 82 then waiting to collect was the best choice.  If I die before age 82 then I was a fool.  Both my parents died at age 79.  I think I will take the money and run! 
Apr 18, 2012 4:19PM
You mean with the "New Economy" there's a choice?

Not being one of the Banksters or Wall Street criminals on Easy Street who stole the world blind and almost took the U.S. economy down the tubes, I'd say the answer is "yes, yes I should [delay retirement]"

Next dumb question please?

Apr 18, 2012 4:32PM
Delay it for five more years so another Bernie can make off with your money.
Apr 24, 2012 9:19AM
I "ran the numbers." If I delay SS income from age 66, the current age of "full retirement," to age 70, I'll be 92 before there is a benefit to waiting. For me, it's not worth the wait.
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
100 character limit
Are you sure you want to delete this comment?


Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.


Smart Spending brings you the best money-saving tips from MSN Money and the rest of the Web. Join the conversation on Facebook and follow us on Twitter.