–from US News & World Report-Money
Working for an additional year can have a significant impact on your retirement finances. A single extra year of work can boost your Social Security payments, give you more time to accumulate retirement savings and shorten the period of retirement you need to pay for. Here’s a look at how delaying retirement for one year can improve your retirement budget.
Bigger Social Security payments. Working an extra year can increase your Social Security payments in two different ways. First, Social Security payments are calculated using the 35 years in which you earn the highest salary. If you earn more now than you did earlier in your life, this year’s higher salary with be factored into the calculation. And if you haven’t yet worked for 35 years, working an extra year will prevent a zero from being averaged into your retirement benefit calculation and dragging down your retirement payouts. “You could replace a zero earning year with a year you have income, which will make your Social Security payment higher for the rest of your life,” says Ryan Thomas, a certified financial planner for Column Capital Wealth Management in Indianapolis.
Second, your monthly benefit payment changes depending on the age you sign up for Social Security. If you start payments before your full retirement age, which is 66 for most baby boomers, monthly payments are reduced. Your payment amount increases if you delay starting benefits after your full retirement age up until age 70. “If you are going to work longer and delay your Social Security takeup, then that could, depending on how old you are, increase your future Social Security benefit you receive each year by between 6 and 8 percent a year,” says Richard Johnson, a senior fellow and director of the program on retirement policy at the Urban Institute. A person eligible for $1,500 per month from Social Security at age 66 could boost his benefit to $1,620 per month if he puts off claiming until age 67, and that higher benefit will last for the rest of his life.
More time to save. You can become a super-saver during your final year of work, tucking away as much as possible for retirement. Saving for retirement can qualify you for a variety of tax breaks. If you are age 50 or older you can take advantage of catchup contributions, which allow you to put away an additional $6,000 in a 401(k) and $1,000 in an individual retirement account, so you could defer paying income tax on as much as $24,000 in a 401(k) or $6,500 in an IRA. Or you could pay the income tax now by saving in a Roth 401(k) or Roth IRA, and set yourself up to get tax-free distributions in retirement. Most retirement accounts require earned income, so you won’t be able to claim these retirement savings tax breaks once you stop working. If your employer provides a match on your 401(k) contributions, you will be able to boost your nest egg even further. “When you work a lot of times your employer helps cover your health insurance costs,” Thomas says. “That’s one more year you are getting company benefits, vision, dental and a company match for your 401(k).”
Compound interest. Delaying retirement gives your existing retirement savings more time to grow. If you have $250,000 in a retirement account and it earns a 5 percent return, that’s another $12,500 added to your nest egg. You could also work an extra year if your investments are preforming poorly and you want to give them some time to recover before you begin withdrawing money from your portfolio. “You ideally don’t want to start withdrawals in a year when your portfolio is down,” says Danielle Schultz, a certified financial planner for Haven Financial Solutions in Evanston, Illinois. “Even if the market is no better in a year you will have put more money into your retirement account and delayed spending for another year.”
Fewer years of withdrawals. If you are currently in good health, you could be retired for 20 or 30 years. Saving up enough to finance several decades of retirement can be difficult. Working an extra year shortens the period of retirement you need to pay for. “Just one year can be really important because it allows you to save more, and it means that those savings don’t have to last quite as long,” Johnson says.