The Advantage to Delaying Retirement

When should I retire?  That’s a question millions of people ask themselves, their friends, and their financial advisers each year. There was never a one-size-fits-all solution, and now, in these highly uncertain times, the path to finding an answer is more challenging than ever.

Lots of factors go into the decision-making process: your health, finances, age, desire to continue working, and desire to stop working.

Even before the pandemic laid waste to many well-thought-out plans, a growing number of people were working longer. For baby boomers who thought they were on the right path to retirement, a slew of new roadblocks and detours have appeared, including the recent damage to their nest eggs and a sudden risk to their job security.

“The depletion of personal assets, along with employment relationships, have been thrown up in the air,” says Alicia Munnell, director of the Center for Retirement Research at Boston College. “Finding a job will be much more difficult now than it’s ever been before.”

More than anything else, postponing retirement for a few years gives you more time to save, more time to invest in retirement accounts and collect employer matches, and more time for those accounts to grow before you need to begin tapping into them.

“I’m a great proponent of working longer,” says Munnell. “It gives structure to your day, social interaction, and financially it is the most important lever you can pull to guarantee financial security.”

Various studies from the government and private researchers show that the average retirement age for Americans is around 64 for men and 62 for women. (Average here means that half of the population leaves the labor force at those ages.) 

For nearly a century, beginning in the 1880s, the average age of retirement declined, partly due to rising incomes and the introduction of safety net programs such as Social Security and Medicare. The curve changed beginning in the 1980s, with a greater number of people continuing to work into their late 60s and beyond. There are several important reasons why according to the Center for Retirement Research at Boston College:

  • Improved health and longevity. Life expectancy for men at age 65 has increased by about four years since 1980
  • The decline in corporate health insurance plans for retirees, while the cost of health care has soared
  • The shift from defined pension plans to individual retirement accounts and 401(k)s
  • Higher education levels, which correlate closely with longer careers
  • Jobs that are less physically demanding on aging bodies. It’s far more likely for people with desk jobs to continue working than for those who toil at back-breaking manual labor jobs

The chart below offers an illustration of how the Average Retirement Age changed between 1962-2017.

There is also the well-documented advantage of delaying claiming your Social Security benefits. You are eligible to collect reduced benefits starting at age 62, but doing so permanently locks in a lower monthly payout. To receive your full benefits, you must wait to attain your Normal Retirement Age (NRA), which depends upon your year of birth. Each year you wait beyond your NRA adds about 8% to your monthly check. But nearly half of all Americans take the Social Security benefits at age 62.

Another disadvantage of early retirement is the high cost of health insurance. Medicare does not kick in until age 65. If you are dependent on a work-based insurance plan that is heavily subsidized by your employer, you might be shocked at the cost of buying coverage out of your pocket. Even COBRA, which allows you to stay on your employer plan for up to 18 months, is far more expensive than what you pay as an employee. Health care costs are the top concern for most retirees.

All of these considerations depend in part upon your health and your expected longevity. It is worth taking a serious examination of your current health and then try to factor in your family history.  

In general, retiring early requires a more significant nest egg. One often-cited formula for figuring out if you can afford to retire at age 60 says that you will need to sock away 25 times your annual expenses, minus Social Security, so that you will not outlive your savings. This research assumes a defined retirement period of 30 years. Retiring earlier than 60 will require even more.

Another wrinkle in the process is that you may not have full control over whether you continue to work as long as you’d like to. Four out of five recent retirees said they encountered health problems earlier than they had anticipated, according to a survey by the Nationwide Retirement Institute. Another study, done by Gallup in 2018, shows that most Americans plan to work until age 66, which is up substantially from 2002. But most people do not stay on the job as long as they had projected they would.

Munnell notes that older workers can’t get fired because of their age, but they often get “eased out” of the workplace, and once they lose their job, it’s challenging to find another one.

So, delaying retirement is not always up to you. Unforeseen events beyond your control can lead to layoffs, and Coronavirus certainly falls into the category of unforeseen circumstances. As businesses try to recover, unemployment is soaring, and many companies might be more inclined to retain younger, healthier, and cheaper employees. Also, older workers often don’t have the technical skills that the job requires going forward.    

Some retirees, whether by choice or by circumstance, may choose to work part-time. For some, it’s an ideal transition, giving them a flow of income, as well as a sense of personal fulfillment and social contact – something we will all crave after getting out of isolation.

There are also plenty of non-financial advantages to retiring early: you have more time to enjoy your hobbies, take classes, travel, and spend time with your grandchildren. You can enjoy a less stressful life at a much more leisurely pace.

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