The following is a post by MPFJ staff writer, Kevin Mercadante, who is a freelance professional personal finance blogger for hire, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry.
Many people can’t wait to retire. At the same time, a lot of people – including many of those who can’t wait to retire – are also more than a little bit concerned by the prospect of outliving their money. It can be a nightmarish thought too – to consider the possibility of being several years into retirement, then running out of money. That creates some compelling reasons to continue to work early in your retirement years.
Here are some advantages to doing just that:
1. Maximize Your Social Security Benefits
Statistically, the majority of people retire at age 62 or shortly thereafter. Financially, this is an unwise move. Your Social Security benefits can rise significantly the longer that you delay collecting your benefits past age 62. In fact, benefits increase somewhere between 5% and 8% each you that you delay collecting them, up to age 70. (There is no advantage to delay taking your benefits past age 70, since increases won’t apply.)
According to this chart put out by the Social Security Administration, Effect of Early or Delayed Retirement on Retirement Benefits, if you begin collecting benefits at age 62, your monthly check the only 70% of what it will be if you wait until you’re full retirement age, which for anyone born in 1960 or later, will be age 67.
Further, if you delay collecting your benefits until age 70, your monthly check will be 24% higher than it would be if you start collecting at the full retirement age of 67.
This is an excellent strategy to increase your Social Security income in retirement. But it’s one of the very best retirement strategies you can take advantage of if you don’t feel that you have saved enough in your retirement plan to retire comfortably. If you can continue to work past age 62, you can increase your monthly benefit for every year that you delay.
2. Maximize Your Investment Earnings and Contributions
If you can work early in your retirement years, you’ll have an opportunity to continue to increase your retirement savings. This is another excellent catch-up strategy, if your retirement savings will be insufficient by the time you reach retirement age.
Let’s work an example to illustrate how effective this strategy can be.
Let’s say that you will have $250,000 saved for retirement by age 62 – the age at which you hope to retire. Using the safe withdrawal rate of 4% per year, your retirement portfolio will provide you with an income of $10,000 per year. Combined with a Social Security benefit of $14,000 per year, you’ll scrape by on an annual income of $24,000 per year, or about $2,000 per month.
But let’s say that you really can’t live on that kind of money – what can you do?
If you delay your retirement until you’re full retirement age of 67, and continue to work, how much can you increase your retirement savings in just five years? More than you think!
If you are earning an average of 8% per year in investment income on your retirement savings, that means that will add an additional $20,000 per year to your portfolio for every year that you delay your retirement.
Now let’s also say that you are contributing $10,000 per year to your company 401(k) plan. If you add that to the $20,000 in annual investment income on your portfolio, that means that you will be adding $30,000 to your retirement plan each year you delay your retirement.
After five years ($30,000 per year X 5 years), your plan grows to $400,000. Again, applying the safe withdrawal rate of 4% per year to your retirement portfolio, you’ll be able to withdraw $16,000 per year from your savings.
At the same time, by continuing to work until you reach your full retirement age, your annual Social Security income rises to $20,000. When you add that to the $16,000 in retirement plan distributions, you are now up to $36,000 per year – or $3,000 per month – in retirement income.
That’s an increase of $1,000 per month – or 50% more than you would have gotten at age 62 – just for continuing to work, and delay your retirement for five years.
3. Minimize Your Retirement Portfolio Drawdown
The earlier that you begin taking withdrawals from your retirement portfolio, the more quickly the account will become depleted. By continuing to work and delaying your retirement, you’ll also avoid drawing down on your retirement portfolio.
This is an arrangement that can work especially well, when you consider that in the early retirement years, you will likely be more able to earn additional income than you will be later in life. It makes a strong case for deferring tapping your retirement assets until later in life when it’s more necessary. The longer you can work, the longer you can do that.
4. Reduce the Number of Years You Need to Rely on Your Portfolio
The other advantage to continuing with work early in the retirement years is that you can reduce the number of years that you need to draw from your retirement portfolio.
For example, let’s say that you expect to retire at 65, and to live to be 85. That means that you need your retirement savings to last for 20 years.
You will have $400,000 in retirement savings by age 65. You decide that you really need $24,000 per year from your retirement savings, but when you divide that by $400,000 (assuming that future investment income is offset by inflation), that will only cover a little over 16 years.
If you continue to work until you are 69, and delay taking withdrawals from your retirement plan for four years, your retirement savings will still get you to age 85 (age 69 + 16 years worth of retirement savings).
5. To Take On New Challenges That Weren’t Possible Before
60-something is a lot younger today than it was 50 years ago. This is in part because people generally are taking better care of themselves, there have been significant medical advances, and the fact that people are doing work today that is much less physically taxing than what it used to be.
It is entirely possible that, unburdened by the necessities of middle age, you will be able to embark on an entirely new career. It may well be that there is a career or business idea somewhere out there that you have been harboring for many years. The early retirement years may be the very best time to turn that dream into a reality.
Retiring to a life of leisure is hardly a universal desire. Even people who have the financial means to completely retire, often continue to work, or to simply move into a different venture. A new venture may be something that’s a lot less stressful, and a lot more enjoyable. The early retirement years can represent an opportunity to pursue that kind of goal.
If you find such a career, it will enable you to put virtually all of the strategies in this article into effect. If you can, your retirement years will be the easiest years of your life, even if you don’t ever actually retire.
How about you all? Do you have any experience or know someone who has had experience with continuing to work during the early retirement years? Do you know of other benefits to working in your early retirement years that are not listed above?
Share your experiences by commenting below!
***Photo courtesy: https://www.flickr.com/photos/92334668@N07/11123538363/sizes/n/
