The Value of Delaying Retirement
August 2006

Arthur Winston Earlier this year, three weeks after retiring on his 100th birthday, Los Angeles County transit employee Arthur Winston died in his sleep. Winston had missed only one day of work in 72 years, and that was to attend his wife's funeral.

While Winston's achievement is one for the record books, a growing number of people claim they're following his example. According to a survey last year sponsored by the Society of Actuaries, 13% of pre-retirees say they'll never retire, up from 4% in 2001 and 8% in 2003. If the "work forever" attitude continues rising at this rate, we'll hit 100% in a little over 5 years — right around Labor Day, 2011.

Professor of Finance Jeremy Siegel has a more plausible forecast. In the May 2005 Rule Your Retirement "Expert Corner" he predicted that the average retirement age in the U.S. will increase by about 10 years. Siegel recently renewed his prediction at the Milken Institute's 9th annual Global Conference: "Life expectancy will continue to rise. But the retirement age will rise substantially more, I believe, from 62 today to 73 or 74 in the future."

The Benefits of Waiting

Whether your retirement decision is driven by your work ethic or limited resources, one thing is certain; if you work longer and delay nest-egg withdrawals, your retirement strategy benefits three ways:

  1. More time to save. You can add to savings and make "catch-up" contributions to your IRA and 401(k).

  2. More time for investments to grow. The power of compounding and the generally upward trend of markets are your partners in wealth creation.

  3. Smaller nest egg required. Every year that you fund from earned income is one less year to fund from savings.

Let's consider the retirement timing for someone age 60 with previous-year taxable earnings of $60,000 and a $500,000 nest egg growing at 7%. We'll also assume that our pre-retiree would receive a modest annual salary increase and would save 10% of taxable income for each year of continued employment. The table here illustrates six retirement scenarios from age 60 to 70. Even with a consistent initial withdrawal rate of 4%, the salary replacement percent increases significantly with each scenario.

Age at Retirement

60

62

64

66

68

70

Salary at Retirement*

60,000

62,000

66,100

70,300

74,600

78,900

Nest Egg**

500,000

585,077

683,113

796,213

926,582

1,076,731

4% Withdrawal

20,000

23,403

27,325

31,849

37,063

43,069

Social Security ***

0

14,496

18,672

22,848

29,250

35,652

Retirement Income

20,000

37,899

45,997

54,697

66,313

78,721

Salary Replacement

33%

61%

70%

78%

89%

100%


   *Previous year taxable income after age 60
   **Assumes a 7% compound growth rate and a 10% savings from taxable income
   ***Estimates from the SSA Quick Calculator set to show future values

The increasing retirement income is the combined effect of nest-egg growth, which more than doubles between ages 60 to 70, and Social Security benefits, which start at age 62 and increase steadily to age 70. The normal retirement age (NRA) for someone who is 60 this year is 66. By continuing employment to NRA, our retiree would be near the top of the 70%-80% salary replacement range often mentioned as a rule of thumb retirement income target. And delaying an additional four years would put the replacement income equal to the final pre-retirement salary.

Foolish Delaying Tactics

If delaying retirement seems like a winning strategy, here are some tactics to ensure success.


An alternate version of this article appeared in the August 2006 Motley Fool Rule Your Retirement newsletter.