Concerned about having enough money saved for retirement? Here’s a simple solution: work just a few years longer. By accumulating more savings and shortening your withdrawal period, you’ll reduce the lump sum needed to generate the necessary income at retirement.

In a report titled “Retirement Age and the Need for Saving,” the Congressional Budget Office (CBO) analyzed the impact of retirement age on the total assets needed in retirement. Here is the conclusion:

Every additional year of work leaves individuals with more income, a shorter retirement to finance out of pocket, more time to save and earn returns, and higher Social Security benefits. Taken together, those factors can substantially reduce the private assets needed to maintain their
working-age standard of living in retirement.

Consider a married couple in their early 60s earning $77,000 per year. After paying federal and state income taxes and Social Security taxes, the couple takes home about $58,600 in annual income. To replace 80% of their income in retirement, they will need $46,900 in after-tax income.

If both spouses retire at age 62, the couple will receive about $20,100 in Social Security benefits annually. This means they will need another $26,800 of after-tax income per year. The CBO estimates that it would take a lump sum of about $510,800 at age 62 to generate the necessary income.

If the couple were to retire at age 63, their annual Social Security benefits would increase to about $21,600, so they would need to finance $25,200 per year after taxes themselves. In this case, the required lump sum drops to $465,000. The amount the couple needs to accumulate continues to decline for each year that they delay retirement, to about $298,400 if they retire at age 66 and to about $117,700 if they retire at age 70.

Postponing retirement a few more years also offers the following benefits:

• More salary to save and invest or pay down debt. Pre-retirees at the peak of their careers can make substantial contributions to their retirement and investment accounts and dedicate a chunk of their income to debt reduction.
• Higher Social Security benefits. Applying for Social Security benefits at full retirement age (66 for anyone born between 1943 and 1954) produces a 25% higher benefit than applying for early benefits at age 62. Waiting until age 70 more than doubles the benefit compared to the amount available at age 62.
• Higher pension benefits. Whether a pre-retiree participates in a traditional pension plan with benefits based on salary and years of service, or a 401(k) plan with an employer match, working longer will, in most cases, boost those benefits and result in more assets to draw from in retirement.
• Save on health insurance premiums. Retirees who go from an employer-sponsored health plan straight to Medicare at age 65 can avoid the high cost of individual health insurance during ages 55-64.

To help you ensure that your investment plan and goals are on track for a secure retirement, consider consulting with a professional financial advisor who specializes in retirement.

Reesa Manning is a Senior Financial Advisor at Integrated Wealth Management, Inc., a Registered Investment Adviser. Contact Reesa at 760-834-7200 or [email protected].

Read or write a comment