People view retirement as the ultimate reward for decades of hard work. Many look forward to the day they can say goodbye to the monotony of the daily punch clock and finally kick back to enjoy the precious golden years. However, those who study retirement closely will find no one-size-fits-all strategy on how and when to retire. Moreover, savvy individuals are rethinking the traditional retirement age by delaying retirement for various reasons.
Contrary to convention, retiring later can be a wise financial decision. Late or delayed retirement can come with its benefits. It can also be a practical decision based on one’s financial circumstances. Whether you’re nearing retirement age or at the peak of your career, it helps to consider the advantages of postponing your retirement plan by a few years.
Is delaying retirement a smart move?
Pushing back retirement is an unconventional choice, yet it is one that more and more people are beginning to make. The average retirement age in the US is 65 for men and 63 for women.
The transforming economic landscape and changing demographics wherein populations are aging and living longer contribute to the changing retirement timeline. The following are the top reasons to delay retirement:
1. Adding to retirement savings
By delaying retirement for several years, you can boost your nest egg strategically. You can contribute to 401(k)s, IRAs, or pension plans by working a few additional years.
To boost your savings, you can make the most of employer-matching contributions. In the US, some employers match a percentage of retirement account contributions. Hence, you can accumulate these matching funds by staying longer in the workforce.
For instance, let’s assume a scenario wherein your employer matches a maximum of 50% of the first 6% of your annual salary that you contribute to your 401(k). With a $100,000 yearly salary and a contribution of 6%, your contribution would be $6000. Thus, 50% of $6000 would be $3000—your employer’s match. Your total contribution would then be $9000 per year. A 3% salary contribution matched at 50% or $1500 would yield a total of $4500 in contributions.
Furthermore, past age 50, you become eligible for catch-up contributions to your retirement accounts. Additional contributions to your 401(k)s and IRAs can significantly bolster your retirement savings. As of 2023, individual workers can contribute up to $22,500 to their 401(k) plans—this amount is up from the maximum limit of $20,500 in 2022.
In addition, the income ranges that determine your eligibility for deductible contributions to Roth IRAs, traditional IRAs, and for claiming the Saver’s Credit will all be adjusted for 2023. All eligible income ranges will increase.
All taxpayers need to know all the IRA and 401(k) limit increases in 2023, including the following key points:
Catch-up contributions limits
An increase in the catch-up contributions for employees age 50 and above participating in SIMPLE plans will be adjusted from $3000 to $3500. Also, the catch-up contribution limit for those of the same age bracket participating in most 457 plans, 401(k)s, 403(b)s, and the Thrift Savings Plan of the US federal government will increase to $7500.
Increase in IRA annual contributions limits
For IRAs, the annual contributions limit will be increased to $6500. However, the IRA catch-up contribution limit or max for those aged 50 and over remains at $1,000 and is not subject to a cost-of-living adjustment.
Also, you may live longer than you think. A 65-year-old man today has a 50 percent probability of living past 85. Sixty-five-year-old couples may be surprised to know that there is a 50% chance that one of them lives past 92. With your golden years possibly extended, there’s more motivation to accumulate as much savings as possible before you retire.
2. Extending the time horizon for investing
Savvy investors delay retirement to take advantage of the investing time horizon. Not cashing out on investments immediately allows them to grow for a few more years.
For example, a diversified portfolio with a 7% annual return delayed by five years could produce an additional 35%. The projection assumes, however, that the market performs consistently. This strategy offers a practical advantage to grow your portfolio passively.
By delaying retirement, you can benefit from compound interest. The longer your money is invested, the more time it has to grow and generate exponential returns from your principal and previous earnings.
Choosing a longer time horizon also allows you to strategize your investments to allow for aggressive growth properly. Longer time horizons will also enable you to take more risks and allocate a portion of the portfolio to high-growth assets. This extension can increase your wealth substantially over time. Moreover, you can weather market downturns much more easily than those with shorter investment periods.
3. Accumulating Social Security benefits
You can boost Social Security benefits by delaying retirement a few years. The computation for Social Security benefits in the US is based on the highest 35 years of earnings. The benefits increase every year you postpone retirement until the absolute age limit.
You need ten years of work or 40 work credits to qualify for Social Security. To be eligible for the maximum benefit, you need a record of earning Social Security’s total taxable income for 35 years. In 2023, the earnings cap subject to Social Security tax is $160,200, up from 2022’s limit of $147,000.
How to get the maximum Social Security benefit
There are steps to optimize Social Security benefits. First, you must earn the maximum taxable wage, as stated above. Social Security will take your 35 best-paid years adjusted for inflation. It then averages those years together to compute your benefits. To make the most out of your Social Security benefits, you must contribute the maximum allowable amount. The max is adjusted periodically based on the US national average wage index across the time frame.
Next, you need to choose to start receiving your Social Security benefits later—at age 70. While it’s possible to begin accessing your benefits by age 62, postponing the receipt of these benefits till 70 will ensure that you get the maximum monthly amount when you retire.
4. Holding on longer to employer benefits
As employees, some would-be retirees enjoy valuable benefits from their respective employers. Such benefits include life insurance, healthcare coverage, and retirement plan access. Delaying retirement lets employees enjoy these perks longer. The benefits offered by an employer can save you thousands of dollars and even provide valuable financial support in health emergencies.
When you extend your employer-sponsored health insurance, you enjoy better coverage and lower premiums. This scenario is better than having an individual plan or Medicare, saving you thousands of dollars annually.
In addition, if your employer provides you with life insurance coverage, you can keep this coverage and avoid expensive premiums in retirement.
5. Buffering financial security
Financial security is a growing concern among would-be retirees and those already retired. When they’re out of a regular job, many feel less secure about their finances. By delaying retirement, you can add to your savings and contribute to Social Security for longer—thus increasing benefits and reducing the probability of outliving your retirement funds.
The latest Retirement Confidence Survey or RCS conducted by the EBRI or Employee Benefit Research Institute and Greenwald Research reports that workers’ and retirees’ confidence in their ability to finance their retirement has significantly dropped in 2023.
Some of the reasons behind this plummeting confidence in retirement security include today’s uncertain economic climate, fueled by the threat of unchecked inflation, and some prevailing effects of the pandemic. Economic concerns are eroding Americans’ confidence in their retirement preparations.
The survey of 2,537 Americans was conducted between January 5 and February 2, 2023. Respondents were of working age or older. They were worried their salaries would be increasingly unable to keep up with inflation. Retirees worry about the cost of living and future expenses. The cost-of-living crisis has been setting alarms everywhere, including the US.
Furthermore, 50 percent of retirees reported higher overall spending than expected. This figure represents an increase over last year’s figure of 30%. Among other key findings in the survey are the worsening of debt problems among workers, decreasing retirement accounts with retirement savings taking a hit over the last twelve months.
It also highlighted a lack of understanding of retirement plan investment options and the respondents’ preference for income stability in retirement over the prospect of growth in investments.
6. Delaying Required Minimum Distributions (RMDs)
Those with tax-advantaged retirement accounts like 401(k)s, or traditional IRAs must start taking distributions by age 72. Extending your years of work will allow you to delay the distributions, which may reduce liability.
For example, someone with a substantial IRA and a higher tax bracket can save up to thousands of dollars yearly if they delay their RMDs.
7. Achieving financial freedom by paying off debt
Many of today’s would-be retirees still carry debt. Working for additional years allows one to pay off some or all outstanding debt. Such debt can come from credit card balances, loans, or mortgages.
Retirees can free up retirement income for other purposes, including leisure, when debt is eliminated or reduced. Moreover, being debt-free before retirement significantly reduces financial stress. You can enjoy your golden years without the burden of monthly debt payments.
When you delay retirement to reduce or eliminate debt, prioritize high-interest debt. Examples of high-interest debts are credit cards and personal loans. When you pay off such obligations, you free up more income for savings and investments.
You can also use the delayed retirement years to accelerate your mortgage payments. It’s crucial to reduce the principal on your loan and thus shorten your mortgage term. Paying off your mortgage early could potentially save you tens of thousands in interest.
8. Pursuing passion projects
Delaying retirement doesn’t mean you must stay in the same job you’ve had for decades. You can stay in the workforce but in a new company, project, or career that makes you more fulfilled.
You can pursue practical careers that offer a steady income without much of the rat race associated with your youth. You can be an independent accountant, become a notary, or start a fresh career as a consultant in your field.
You can also pursue passion projects that weren’t feasible earlier in life when you were still starting out, like starting a business.
Many successful entrepreneurs started their businesses in their forties or later. Middle age can be a catalyst for business success. You combine the wealth of your experience with some financial security accumulated from your savings. You can follow your passions and leverage decades of expertise.
The public often gets caught up in the myth of the young Silicon Valley startup founder. Reality is much more grounded. On average, the most successful US startups—those in the top echelons of growth—were launched by founders aged 45. Thus, it’s twice more likely for a 50-year-old entrepreneur to establish a highly successful startup than a younger rival. Pre-retirement passion projects can be a source of financial success and personal accomplishment.
Staying in the workforce or business longer isn’t always about the money. It can be an opportunity to establish a legacy and devote more time to community and public causes. You can also work longer and use the additional savings to establish philanthropic projects.
If one of your lifetime goals was to establish a local scholarship fund or donate to a favored charity, delayed retirement can allow you to add to the financial capability required to contribute to your legacy.
9. Promoting health and wellness
For some people, an abrupt halt to mental and physical activity and the social interactions they’re used to at work can adversely affect their psychological and physical health. Engaging in daily social interactions and meaningful activities contributes to overall well-being.
For many retirees, part-time work and volunteerism contribute to their general wellness. Furthermore, research shows that continued engagement with meaningful work in late retirement is associated with better cognitive faculties and physical functioning among older adults.
10. Waiting out inflation
Today’s inflation rates are concerning. If you are concerned about retirement preparedness, it may make sense to wait out the current scenario of rising prices and ensure you are on more stable footing before retiring. If you are unprepared to face the rising cost of living uncertainties, it’s better to stay in the workforce longer and observe whether circumstances will improve in the coming years.
Late Retirement: A Power Move To Maximize Financial Potential
In a world where traditional retirement concepts are being transformed, more individuals are discovering that delaying retirement can be an astute financial move with the right strategies. Moving retirement by several years allows you to accumulate more cash and assets and compound your investments.
In summary, you can use retirement to boost your nest egg by maximizing retirement contributions, optimizing Social Security benefits, paying off debt, extending your investment horizon, keeping your employer benefits, strategically delaying RMDs, and pursuing new and engaging passion projects that could be income-generating. The time between your peak working years and retirement could be a golden horizon where you supercharge your wealth while creating opportunities for self-discovery.
Instead of seeing it as a mere transition period, use late retirement as a power move to craft a new beginning—financially secure and emotionally fulfilled.