When peopleespecially baby boomersstart to get serious about retirement planning, they are often shocked and dismayed because they havent saved enough money. They realize the $50,000 the typical baby boomer has saved by age 50 wont go very far once they stop work. Based on a retirement age of 65, they wont have enough money to live comfortably.But who said you have to retire at age 65? A quick look around shows that 65 is no longer old. People are more than capable of working to age 70, and it can make a world of difference in terms of retirement income.
First, they have five more years of saving for retirement. That is no small thing. By the time they reach their late 50s or early 60s, people who are (finally) serious about saving for retirement typically put away 20% of their annual income. If they put off retirement for five years, they save a full years salary.
Second, if they delay retirement to age 70, it gives them an additional five years to let their savings and investments grow on a compounded basis.
Here is a very simple example to show how powerful the concept of 70 is the new 65 can be. Lets look at the typical baby boomer who, at age 50, has put away $50,000 for retirement. Lets make him as typical as can be. We will assume he is married and he and his wife earn a combined $110,000 a year.
Seriously concerned about their retirement, they start saving a combined $11,000 a year, which well assume earns 8% compounded tax-free in a retirement account. By age 65, they will have $322,567.11. That sounds like a decent amount of money. But, if they withdraw 4 percent a year to live onthe maximum we believe you can comfortably withdraw without outliving your moneythey will only have $12,902.84 a year. Not great.But, if they continued to work to age 70 instead of 65, and still saved just $11,000 a year, theyd end up with $543,652.14, or nearly 70 percent more money; withdrawing 4% annually would give them $21,746 a year.There are, of course, other benefits for pushing back retirement. If you delay taking Social Security, the size of your monthly check increases. With that in mind, lets go back to our mythical couple and assume that their combined $110,000 salary comes about because they both make $55,000 a year. If they take benefits at age 65, they each will receive $1,501 a month. But that number climbs to $2,198 each if they wait until age 70.So, just to quickly review. If this couple retires at age 65, they will have a total of $4,077 a month coming in$3,002 from Social Security, the rest from withdrawing 4% of their savings. Its tough for a couple who is used to making $110,000 a year to live on $49,000 a year.
But if they waited until age 70, they would have a combined $6,208, or 52% more income. Our mythical couple is likely to live more comfortably on $75,000 a year than $49,000.Then there are advantages that you would not necessary think of at first. For example, at 65 you might decide to leave your current employer (possibly taking a package) and then spend the next five years (or longer) working as a consultant or starting your own business. True, you might not make as much as you did in your current job, but a) you still will have some income coming in, and b) your retirement savings continue to grow. In essence, this strategy allows you to attempt a new career risk free. Then, if your new job doesnt work out, you can simply retire. And youll feel a lot more financially secure than you would have five years ago.
