Should You Consider Delaying Retirement? The Answer Might Surprise You

Dear Carrie,

I’m getting close to retirement but worried because the market has been so volatile over the last several months. Would it be smarter to delay retirement a bit longer before beginning to draw from my accounts?

—A Reader

Dear Reader,

This is such an important question because when and how we retire is one of the biggest financial—and personal—decisions we'll ever make. The short answer to your question about timing is that yes, working longer is just about always a financial plus for many reasons, and probably much more than most people realize.

As you point out, market volatility can be especially unnerving for those who are close to or in retirement. In 2020 we saw some extreme ups and downs, primarily due to the pandemic. This is a clear illustration that we can make estimates but never predict the stock market, which is inherently volatile. Therefore, my thoughts about retirement timing this year are the same as they were last year or the year before that. We always have to bake the potential for volatility into our planning and investment choices. 

It’s also important to recognize that retirement doesn’t have to be an all-or-nothing decision. With people living longer and having more lifestyle choices it can make sense to pursue a phased retirement, gradually working less over a number of years.

Let’s take a look at why working longer, even part-time, can be a powerful way to improve your retirement prospects, regardless of current market activity.

Working longer means more years to earn and fewer years to spend

It really makes intuitive sense: assuming that your health is not adversely impacted by your job, you’ll have more financial stability the longer you keep working. For example, if you enter the workforce at age 20, retire at age 60 and live to 90, you’ll need to fund 30 years of retirement from 40 years of savings. But if you continue to work until age 70, you’ll have 50 years to build savings to support 20 years of retirement.

Working longer can be much more powerful than saving more while working

Beyond the obvious impact of shifting the ratio of work years to retirement years, a significant study from the Stanford Institute for Economic Policy Research has shown that delaying retirement by as little as three to six months can have the same positive economic impact on one’s retirement nest egg as saving an additional 1 percent for thirty years. And the later in your work life you decide to increase your savings, the less the benefit: working for just one additional month has the same financial power as saving an additional 1 percent for ten years.

Now of course this doesn’t mean that you shouldn’t continue to save diligently for your retirement. It simply underlines the power of working longer.

Working longer allows you to earn more Social Security benefits

Social Security benefits are based on your highest 35 years of earnings. Therefore, if you’re earning more now than when you were younger, by working longer you can replace lower earning years. Of course, every person’s circumstances are different; to see how working longer can impact your benefit, check out your earnings record at ssa.gov. 

In addition, your Social Security benefit will increase if you postpone filing until you turn 70. Breaking this down, you’ll get an annual increase of roughly 6-7 percent for every year you postpone benefits from age 62 to what the Social Security Administration considers your ‘full retirement age’ (FRA, which is generally age 67 depending on the year you were born). Your benefit will then continue to increase 8 percent a year up until age 70 (it never makes sense to delay beyond age 70).

And finally, if you’re married, your decision to postpone retirement could help your spouse if they collect a Social Security benefit based on your work record. A spousal benefit is based on the amount you would receive at FRA (not increasing beyond that), but a survivor benefit is based on the amount you ultimately collect (increasing up to age 70).

Working longer allows you to defer certain required minimum distributions

Another less recognized benefit to working longer is that it may allow you to defer taking an annual required minimum distribution (RMD) from your company’s 401(k) or 403(b), provided you're still working for the same employer. (One exception is if you own 5 percent or more of the company sponsoring the plan; in that case, you must begin RMD’s by the age of 72.)

Also note that The SECURE Act passed in 2020 made major changes to RMD rules. Be sure to check in with your financial advisor or accountant to make sure you’re in compliance. The penalty for being late is a stiff 50 percent!

Working longer can improve your health and quality of life

And now I’ve saved the best for last. Depending on your job, your life-style, and your retirement aspirations, working longer may have benefits that extend beyond the financial. After all, work is about more than money for many people. It can provide you with an expanded social circle as well as a greater sense of purpose.

Of course, if your job is too physically or emotionally demanding, you may be wise to make a change sooner rather than later. But if you are still enjoying your work and feel that you are making a valued contribution, working a few years—or even a few months—longer can be a smart decision.

Another great option may be a phased retirement, gradually reducing your work hours over a number of years. I have several colleagues who have done this with great success, finding a new work/life balance that allows them to maintain their professional lives (and income) at the same time that they enjoy new endeavors.

Ultimately, there isn’t one ‘best’ way or time to retire. If you're able to, working even a bit longer can be a big financial boon, regardless of what the stock market is doing. But you need to be realistic in your planning. Talk to your financial and tax advisors to make sure you understand the financial implications. At the same time, it's equally important to examine what retirement will mean to you and your family on a personal level. This is a big decision, not to be taken lightly or made in haste.

Have a personal finance question? Email us at askcarrie@schwab.com. Carrie cannot respond to questions directly, but your topic may be considered for a future article. For Schwab account questions and general inquiries, contact Schwab.