If you’re in the homestretch toward retirement but not confident that your retirement savings are on track for you to live the lifestyle you expect, don’t give up. Two easy, totally realistic steps can dramatically boost your retirement savings. One of our what-if scenarios pays off by adding a hefty $440,000 to your nest egg.
How? Postpone retirement. Any delay works. We’ve run the numbers to show you the outcome if you can afford to delay retirement just four years.
The key is making proper use of those four years.
Here are the two steps:
- Postpone the start of Social Security benefits.
- Continue saving in a 401(k) account.
Retirement Savings Compound, Grow Over Time
Time is the greatest tool any investor has. By delaying retirement, you can let your Social Security benefits grow. Your retirement savings grow too. And the drain on your nest egg is reduced.
But the dramatic growth in your retirement savings and income should seal the deal.
“If a person can hold back from retiring, extending work for four years makes sense for a number of reasons,” said financial advisor Winnie Sun, managing director of Sun Group Wealth Partners, in Irvine, Calif.
Sun added, “Delaying retirement four years gives you, of course, four more years of income, which gives many people mental strength and a sense of financial stability.”
You get to keep your workplace health insurance. Your retirement savings build. You get more time to pay down debts and pay off home loans. You keep your mind engaged. “A four-year delay can reduce the stress of retirement,” Sun said. “And it gives you more time to make choices like where you’ll live in retirement.”
Here’s how our two-step strategy can dramatically boost your retirement savings.
Delaying Start Of Social Security Boosts Your Benefits
Suppose you are 62 years old. You could retire because you’ve reached the age when you can start to collect Social Security benefits.
Don’t do it.
Here’s why. Let’s say you’re a wage slave. You pull down $80,000 a year. You want to retire as soon as you’re eligible for benefits. Your estimated starting monthly Social Security benefit will be about $1,430, according to the Social Security Administration’s benefit quick calculator.
So why not start benefits? Because if you start to collect benefits now at age 62 rather than waiting until what the Social Security Administration calls your full retirement age (FRA), your benefits will be slashed by up to 30%.
Here’s what that would cost you in dollars. If you are about to turn 62 because you were born in 1957, your FRA is age 66 and six months.
If you wait until FRA to start benefits, your benefits would be $2,088.
Would you rather have that extra $658 a month? Thought so.
Obviously, waiting until full retirement age assumes that you can afford to put off starting to receive benefits. If you can’t afford to wait, by all means start as soon as you’re eligible.
Keep Building Retirement Savings
Still, if you can afford to delay benefits, look what happens if you wait until age 70, when your benefits calculation maxes out.
That same person born in 1957, earning $80,000 at age 70, would be entitled to a starting benefit of $2,822.
So delaying retirement from 62 to 70 can be worth more than $1,392 a month in extra cash benefits.
What if you put off retirement half that much time? If you retire four years early instead of eight — which coincidentally would be close to your FRA — your starting monthly benefits would be about $800 less: $2,018.
The additional income at age 70 is due to the fact that “full retirement age” does not mean full retirement benefit. That happens if you wait until age 70 to start.
And our calculation is conservative. For simplicity, we’re assuming an annual income of $80,000 in the year that benefits start. But odds are that the worker in our example would continue to receive pay raises after age 62. Higher earnings would almost certainly boost the size of his benefits.
Retirement Savings: Where’s Your Break-even Point?
Is it worth it? It would take you two years and less than 11 months of benefits to break even — that is, make up for the benefits you’d receive if you start four years early.
After that, all benefits would be net gain.
After, say, 10 years, the four-year delay would put nearly an extra $100,000 into your pocket: $96,480.
“If you have an average life expectancy, delaying retirement puts you in better shape financially in a short period of time,” Sun said. “It really pays off it you have a reasonably long life expectancy.”
Boost Your Retirement Savings By A Quarter Mil?
What about the savings aspect of delaying retirement by four years?
Suppose your retirement savings amount to $720,000 at age 66.
That’s based on Fidelity Investments’ recommendation that you save eight times your income by age 60 and 10 times your income by age 70. For simplicity’s sake, we’ll say you’ve saved nine times your income by 66.
By age 70, your retirement savings should grow to a total of $981,151.
That’s a whopping gain of more than a quarter of a million dollars: $261,151 to be exact, according to AARP’s 401(k) savings calculator.
Real-World Assumptions
The assumptions are totally reasonable. You’d be kicking in a modest 7% of your pay. You’d be getting a 50% company match on up to a maximum of 6% of your pay. So your total contribution would be 10.5% a year. That’s around the target contribution level that experts advise.
Also, your rate of return would be 7%.
That rate of investment return is conservatively well below the actual 10.2% average annual gain by large-cap stocks like the S&P 500 from 1926 through July 31 of this year. And it’s well below the 12.1% average yearly gain by small-cap stocks.
The nest egg calculation also assumes that your pay at age 66 was, yes, $80,000. And that you got pay raises averaging 1% a year.
Boost Rate Of Contribution To Retirement Savings
If you’re feeling adventurous and want to aim for an even better result, that’s reasonable too.
Look what happens if you boost your own contribution to, say, 10%.
Your ending balance at age 70 jumps to $992,364.
That’s a gain of $11,213.
Invest More Aggressively
You can aim for comparably dramatic improvements in your retirement savings nest egg balance by investing more aggressively.
An average annual investment return of, imagine, 9% starting at age 66 leads to an age-70 balance of $1.06 million. And that’s with a yearly contribution rate of 7%.
If you boost the amount you ante up each year to 10% and invest more aggressively so that your return is 9%, your age-70 balance should end up as $1.07 million.
“I have many clients who are working into their seventies,” Sun said. “They don’t do it because they have to. They do it because they don’t want to find themselves being nonproductive.”
As for workers who might need a financial boost, Sun added, “A majority of retirees would work four more years if it meant the difference between having a comfortable retirement and struggling in retirement.”
Bottom Line
So working an additional four years balloons your retirement savings by $261,151 in our basic what-if scenario.
Pumping up your contribution rate and investment aggressiveness can slap on another $85,735 or so.
And delaying retirement can add a $96,480 bonus in Social Security benefits after 10 years.
That’s a cool $443,366. Not a bad reward for exercising patience by delaying your retirement by a modest four years.
