In some cases, a year can make a huge difference. Think back to 2019. It was definitely different than 2020 (to say the least). But sometimes years pass and not all that much has changed. Deciding when to retire is a big commitment. It can be easy to put it off for a year and then again for another year.
Do those years really make a difference in the grand scheme of things? The answer largely depends on your point of view, but the answer is yes. Our choices about when to retire—even waiting one year—affect both our financial and emotional well-being.
The present and future value of your decision
When figuring out when to retire, you need to think about both the present and the future. What is delaying your net retirement now? What does that mean for your future?
For example: If you retire early, can you still afford your future? If you delay retirement, can you be more financially secure without regretting working an extra year? But in terms of time, something will happen (illness or the birth of a grandchild) to make your decision to retire early more meaningful.
Let’s take a look at the real differences when you delay retirement by one year. What if I wait another five years or more?
The two have often talked about the factors that determine when to retire are time and money. And we’ll talk about those below.
However, there are other considerations (feelings) that may push you into early retirement or prevent you from living the life you truly crave:
- For some people, the temptation to earn and save more money is hard to overcome. These are the people who are probably willing to save a lot.
- Others may have a genuine dread of spending their retirement savings.
- Quite a few people retire to get away from a job they hate, but what really matters is retiring into a life you’ll love.
When choosing your retirement date, be sure to consider your own emotional factors, whatever they may be.
Below we’ll try to put together a dollar value for delaying retirement by a year.
Your time is your most valuable resource. And let’s face it, how you spend your time becomes more important as you get older. You have fewer years ahead of you and you want to make the best of them.
Perhaps you should consider time as an important component of your decision-making when you retire. What does it mean to delay retirement by a year or more if you value your time?
If you are happy, fulfilled, and find meaning at work, you probably don’t need to rush into retirement. However, if there are other ways to spend your time that you think are more important, you may want to prioritize retiring sooner rather than later.
Ashley Whillans, associate professor at Harvard Business School, writes about how to think about and value your scarce resource, your time, in her book, Smart Time: How to take back your time and live a happier life.
I became interested in the value of time after noticing that people don’t spend money for optimal happiness. (Get tips on how to spend money for happiness.)
Here’s what she said on the NewRetirement podcast, “If people aren’t spending one very valuable resource in our lives, money, in a way that promotes happiness, I’m sure they probably aren’t improving the way they spend time either.” We’ve also become really interested in trying to understand the trade-offs we make between time. and money.”
It advocates taking time seriously. “So I hear from a lot of MBAs, a lot of CEOs that I talk to, saying, ‘Okay, once I get that title, once I hit that number in the bank, then I can focus on what I’m going to love to do with. Temporary. But I won’t take the time seriously until I achieve that title or that amount of money in the bank. “
How do you value your time? How can you use this assessment to inform your decision of when to retire?
- The cost of postponing retirement a year: Not computable but very expensive. Invaluable time.
If you have a pension, waiting a year can make all the difference between being eligible for the income or not. For most pensioners, when you are eligible for earnings is the most important factor in retirement.
This could be a million dollar decision. So the really best advice is not to retire before you qualify for a full pension.
(The other important decision is whether you take your pension as a lump sum or as payments.)
- The cost of postponing retirement a year: It can be a lot
There are some considerations to think about with regard to delaying retirement and what that means for your Social Security retirement income.
First, you can retire from work and delay starting Social Security. And if this is your decision, then when You may not have worthwhile financial considerations.
However, if you need to start Social Security immediately after retirement and you’re not yet 70, you could take a financial hit. Depending on your Social Security earnings and how long you live, the difference between starting Social Security at age 62 and 70 could be a $500,000 decision in lifetime value.
But what’s the difference between simply delaying the start of Social Security by one year?
highest gain: Let’s say you’re a relatively high earner and will receive the maximum Social Security benefits available. If this were true, your monthly benefit at full retirement age (66 for most people) would be about $3,100. If you delay for a year, you can increase your monthly benefit to about $3,300. That’s $200 per month and $2,400 per year. The boost will result in approximately $50,000 more over a 20-year retirement.
average income: How about a more average person? Does being late for a year still make much difference? The average Social Security benefit at retirement age is $1,500. Delaying the start by two years increases your monthly income by an additional $200. That’s a difference of $2,400 per year and will result in an additional $48,000 over retirement for 20 years.
So, delaying retirement by a year can really make a big difference to your Social Security income because it’s a decision that affects you not just in one year, but over your lifetime.
A different Social Security model starts the ages in the NewRetirement Planner.
- The cost of postponing retirement a year: $48,000
Retirement and retirement planning depends on a variety of interrelated factors: Your income and expenses, how much you save and how much you withdraw from savings will be affected by whether or not you have income from work.
Here are some estimates of what delaying retirement by a year might mean in terms of work income:
Let’s start with the obvious. Delaying retirement gives you an additional year of income. And that’s not a small fraction of the change of maybe $50,000 or more, maybe a lot more than that.
Retiring early simply means that you don’t spend that money or are able to use it for living expenses (and need to pay for life in some way).
- The cost of delaying retirement a year: $50,000 or more.
Business income enables you to delay withdrawals to cover expenses. This delay enables the funds to continue to be invested and to continue to grow. Therefore, a year’s worth of delay could be equal to all you would have had in savings plus your returns on that money.
Many people withdraw about 4% of their savings annually (see 18 Best Withdrawal Income and Retirement Strategies) and the average retirement savings for someone in their 60s is about $200,000.
- Profit for delaying retirement for a year: So, with those averages, delaying that withdrawal for a year would earn you $8,000 on top of how much your money would value. (The estimate might be $1,500 over 20 years assuming a 6% return.)
When you work, you may have higher (or lower) expenses than when you retire – depending on your personal situation.
You’ll want to think about commuting costs, lunches out, fancy coffee on the way to work and your wardrobe — well, if we get out of the pandemic anyway. And if you choose to retire, you’ll need to think carefully about whether your expenses will go up or down. Many people find that they spend a lot more after they retire. Discover the best ways to budget for retirement. Or create a detailed future budget in NewRetirement Planner.
However, the biggest potential factor in terms of expenses and when to retire may be where you live. If you intend to relocate after retirement, this can be a huge financial factor. Buying and selling a home is a big decision and the timing of these transactions can mean big fluctuations in value. Transportation is another factor that can be designed into NewRetirement Planner.
Expenses cannot be easily generalized — delaying retirement by a year may result in a higher or lower burn rate. So, let’s call it even. (But we really recommend that if you’re thinking about when to retire, do detailed personal planning so you can feel confident in your decision.)
- Cost or expense of delaying retirement for a year: Unknown, highly depends on your plans.
First, do you know how much savings you need to get the retirement you want? (Use the NewRetirement Planner for a reliable, detailed estimate.) If you don’t have enough and an extra year or more in the workforce could get you there, keep working.
But maybe you want an extra cushion or leave behind a larger financial legacy. Working longer may enable you to contribute significantly to the savings.
The extra savings — especially if you’re able to make up the savings — can be a great use for an extra year in the workforce. In 2023, you’re allowed to save up to $37,500 annually in tax-advantaged accounts after age 55. (And if you don’t need to take advantage of that money for another 15 years, that $37,500 could grow to more than $85,000. If left compound with a rate of return of 6%.)
- The cost of postponing retirement a year: $85,000
Many workplaces offer benefits in addition to the salary. Health insurance and 401(k) matching are notable items to consider when debating if you should delay retirement by a year.
If you retire before you become eligible for Medicare at age 65, you could face huge out-of-pocket insurance costs. And if your employer offers a 401k match, you’ll be walking away from that money.
health insurance: Fidelity estimates that out-of-pocket healthcare costs no more than $12,000 per year.
401(k) Matching: The most common employer match is 50 cents on a dollar up to 6% of your salary. So, with a salary of $150,000, your employer might add $4,500 to your retirement account (assuming you save at least $9,000).
- The cost of postponing retirement a year: $12,000 + $4,500 = $16,500
Yes. Deferring retirement for one year can be financially beneficial. But the reality depends entirely on your personal situation.
Social security: A year could mean a difference between $0 and $500,000. Let’s take the humble example and say it costs you $50,000 (assuming you start the benefits early).
pension: (Because few people have a pension, and almost no one will retire before it is due, we will leave it out of this total.)
business income: $50,000+
Business advantages: $16,500 ($12,000 for health insurance and $4,500 for an employer match)
Late savings withdrawals: $8,000+
savings contributions: $85,000 (if you can offset contributions and delay withdrawing funds for 15 years)
your time: As the TV commercial used to say, without a price
There’s a wide range of what it might cost to delay your retirement by just one year — but it’s safe to say 100 – 200 thousand dollars is a conservative estimate, however your time is truly invaluable. At a minimum, it has some value to you that should offset what you might gain from working longer.
And don’t forget that if you can retire somewhere less expensive, you may be more than making up for the other costs of early retirement.
There is no right time to retire. This is a big choice in life like getting married or having kids for you.
Use the NewRetirement Planner to run scenarios of what delaying retirement by a year — or moving it up by five years — might mean to you. Just remember to balance the financial side of the equation with how you really want to spend your time.