How Postponing Retirement Really Adds Up


It’s grim news: More and more “retirement age” Americans are sticking around the workplace longer, afraid to give up a steady income after the financial crisis torpedoed their nest eggs.

Postponing retirement is an obvious, if unpleasant, choice when resources come up short. But how long does this purgatory have to last?

Every 50- and 60-something’s needs are different, of course, but retirement doesn’t necessarily have to be pushed back 10 or 15 years (or forever). A delay of three to five years can produce good results by giving investments more time to compound and also by reducing the number of retirement years that need to be funded.

The BankingMyWay Retirement Income Calculator shows that a 55-year old who has saved $250,000 and continues to set aside another $5,000 a year could retire at 65 with a monthly income, in today’s dollars, of $2,753.

That assumes an 8% annual investment return until retirement and 6% afterward.  The new savings would be increased by 3% every year to offset inflation, and the nest egg would last for 30 years.

Simply postponing the retirement to age 68 and reducing the retirement years to 27 would boost the monthly income to $3,408, giving the retiree another $655 a month. This move would be like adding about $200,000 to the nest egg today. Or it would be like making up for a $200,000 investment loss.

Postpone retirement another two years, to 70, and the monthly income would rise to $3,940. (Also look at the Retirement Planner.)
Any such calculation involves a lot of guesswork, since no one can predict investment returns, inflation and future living expenses with 100% accuracy. But doing a little homework can help improve the odds of a good outcome.

The first step is to find how much you are likely to receive from dependable sources like Social Security and any pension from work. Your pension administrator can tell you how much you are likely to receive given various retirement dates. Most traditional pensions use formulas that consider the number of years with the employer and income during the peak or final years, so staying on the job longer could boost your benefit.

You should receive a statement every year from the Social Security Administration describing the benefit you are likely to earn. Order one at the SSA Web site, and look at the various tools to figure things like the best age to begin taking your retirement benefit.

A person entitled to a $1,000 monthly benefit at age 66 would receive just $750 by starting benefits at 62, and could get $1,320 by waiting to 70. On the other hand, starting earlier means getting benefits for longer, offsetting the difference in amount.

The next step is to look closely at your cost of living. It may be possible to save hundreds of dollars a month with relatively painless moves like cutting back on meals out, eliminating some cable channels or keeping your vehicles running a few years longer.

Add those savings to your investments and years of compounding will boost your retirement income. Plan to continue the savings after retiring and your nest egg needs will be smaller.

Finally, look at the big costs of living, like housing. When you are no longer tied to a job, you might be able to move to a less-expensive community. Downsizing to a smaller, cheaper home could leave you with extra cash after you sell, and it could reduce expenses like heating, cooling, taxes, maintenance and insurance.

Quicken, the financial software from Intuit (Stock Quote: INTU), has a very detailed retirement planner that allows the user to run elaborate “what if” scenarios. Morningstar Inc. (Stock Quote: MORN) offers a set of useful retirement planning tools online.

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