You Should Probably Plan On Working Until Age 70

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Photo: Courtesy of The Library of Congress

Only about half of households are on track to maintain their current standard of living upon retirement at age 66. However, if workers are willing to delay retirement until age 70, 86 per cent can expect to enjoy a comfortable retirement, according to recent centre for Retirement Research at Boston College calculations.”I think everybody needs to aim to work longer,” says Alicia Munnell, director of the centre for Retirement Research at Boston College. “If everybody works about five years longer than they had planned, most people would find themselves with adequate retirement income.”

[See 10 Important Ages for Retirement Planning.]

The calculation includes financial wealth from pensions, 401(k)s, and other types of investment accounts, Social Security, and housing, and projects whether it will be enough for people to maintain their pre-retirement standard of living in retirement. Here’s a look at why working until age 70 significantly improves retirement readiness:

Bigger Social Security checks. Social Security benefits increase by about 8 per cent for each year you delay claiming between ages 62 and 70. For example, a worker eligible for Social Security payments worth $750 per month at age 62 would get $1,000 at age 66 and $1,320 at age 70. The dollar value of your cost-of-living adjustments will also be bigger because annual increases for inflation are based on your current payment amount. “If you think you will live to 89, then waiting until 70 probably makes sense,” says Robert Wacker, a certified financial planner and president of R. E. Wacker Associates in San Luis Obispo, Calif.

More time to save. Late in your career can be a great time to save for retirement because your salary is likely to be significantly higher than it was at the beginning of your career. And once your children become independent or you pay off your mortgage, you will have more money to tuck away into a retirement account. There are also extra retirement-savings tax breaks for people approaching retirement age. People age 50 and older can defer taxes on an extra $1,000 in an IRA and $5,500 in a 401(k) in 2012, compared to younger workers.

[See The New Ideal Retirement Age: 67.]

Compound interest. Delaying retirement allows you to further delay withdrawals from your retirement savings. While you are still working, your existing retirement account balance will continue to grow. “You will have more undisturbed growth on those savings because you are not drawing on them and you will have less time that you end up drawing on those savings,” says Wacker. Individuals who are still working after age 70½ (and don’t own 5 per cent or more of the firm offering the 401(k) plan) can defer required withdrawals from their current 401(k) (but not IRA) until April 1 of the year after they retire.

Fewer retirement years to finance. Although no one knows exactly how long he or she will live, working longer shortens the number of retirement years you need to save up for. If you retire at age 65 and live until 90, you need to save enough money to pay for 25 years of not working. You can get by with a much smaller nest egg if your retirement is five years shorter. “You’re meeting your expenses through a longer period of time by working,” says Avani Ramnani, director of financial planning and investment management at Francis Financial in New York. “You have fewer years that your portfolio needs to support.”

Of course, not everyone will be able to work until age 70. Many people are forced into retirement ahead of schedule due to health problems, layoffs, buyouts, or the need to care for family members. And those who have accumulated enough wealth for early retirement are certainly free to exit the workforce.

It’s people who haven’t saved enough to maintain their current lifestyle for several decades who have the most to gain by delaying retirement for a few years. “For the great bulk of the population, it really is possible to change the outlook for your retirement by staying in the labour force a few extra years,” says Munnell.

[See 10 Reasons Not to Retire.]

If age 70 seems too far away, delaying retirement even a year or two still offers benefits. “Usually when you talk about working longer, people just roll their eyes and say, ‘I can’t work until I am 90’,” says Munnell. “That’s not really necessary. Every additional year you can work substantially improves the chances that you will be financially secure in retirement.”

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