Early retirement is a dream for many, but even if you think it’s a possibility for you, that doesn’t mean it’s your best option. In fact, financially speaking, you may be better off not retiring early. Here’s a few reasons waiting to retire may actually be the smart move.
1. You will boost your Social Security payments if you retire on time or later.
Your Social Security benefits are based on your average monthly income during the 35 most prosperous years of your life. If you haven’t worked for 35 years, zeros will be added to the calculation, weighing down your average.
Delaying your retirement may give you an opportunity to boost your Social Security payments if you’re making more money now than you were in the early days of your career.
Waiting to retire may also make it possible to delay Social Security benefits, which will also increase your checks over all. You can begin taking Social Security as soon as you turn 62, but you won’t be entitled to your full benefit if you start this early. The Social Security Administration defines full retirement age as 66 or 67, depending on the year you were born. If you begin taking benefits before your FRA, you will receive a reduced amount per check to account for the extra months that you are receiving benefits. Those who start at 62 will receive 75% of their scheduled benefit per check if their full retirement age is 66 or 70% if their full retirement age is 67.
Conversely, if you wait past your full retirement age to sign up, you’ll increase your benefits. Think of it as a bonus for being patient. This maxes out at age 70, when you get either 124% or 132% of your full benefit, depending on if your full retirement age is 67 or 66. If you expect to live a reasonably long life, you’re better off delaying your benefits because you’ll receive more over your lifetime.
2. Your retirement savings will have more time to grow exponentially.
When you put money into a retirement account, it will grow exponentially, assuming you made smart investments. The longer you leave the money in your account, the larger your nest egg will become, thanks to compound interest on your savings, or compound growth if your savings are invested in the stock market.
To give you an example of how this works, consider a one-time $10,000 investment to your 401(k) made when you were 25. If you’re planning to retire at age 50, that $10,000 will have grown into $73,645, assuming an 8% rate of return. But if you delay your retirement until age 65, that $10,000 investment will be worth $244,000.
Waiting to retire may also help you to delay paying taxes on your earnings. The government requires people who are age 70 1/2 and older to take required minimum distributions (RMDs) from all their retirement accounts except Roth IRAs, in order for the IRS to get tax revenue from these earnings. But if you continue to work past this point, you’re not required to take any RMDs from your current 401(k) until you retire. This gives your savings more time to grow.
3. You won’t need to save as much money in total.
By definition, longer retirements are more expensive than shorter ones. This means that in order to retire early, you’ll have to contribute a larger portion of your income to retirement savings every year. If you make far more money than you need, this may not be an issue, but for most it means accepting a lower standard of living for the present.
If your living expenses amount to $40,000 per year and you delay your retirement by one year, that’s $40,000 less you need to put away for retirement. Take some time to figure out how much you think you’ll need for retirement and then play around with the numbers to figure out how much delaying retirement will save you.
Early retirement isn’t right for everyone. If it’s not an option for you or you’re concerned that it might strain your savings, don’t be afraid to delay your retirement. Even a single extra year in the workforce can make a big difference.
