Many people wait a lifetime to be able to quit spending the majority of their waking time at work, and for some, the idea of delaying retirement for one more day is inconceivable. Yet there are some good reasons why you might want to think about working a bit longer rather than retiring right now. Below, we'll share some of those situations with you, with the idea of deciding whether they apply to you and whether they make sense in prompting a change to your retirement planning.
Retiring at a market top can be devastating to your nest egg
Brian Stoffel: It seems counterintuitive, but retiring at a market top can be the worst thing for the sustainability of your nest egg. Retirees following the 4% rule will take out 4% of their nest egg in year one, and increase that amount every year for inflation. But if the market drops by 20% in the first year, while inflation nudges up 2%, you'll be stuck withdrawing 5.3% of what's left in year two. That money will disappear from your retirement account forever -- meaning a huge opportunity lost for growth.
Of course, 20% drops could happen at any time, so why should investors today be so worried? Fellow Fool Morgan Housel calculated that 20% drops occur once every four years, and 15% drops every two years. The last time we experienced either was the Great Recession...over seven years ago!
That's not to say that you absolutely shouldn't retire right now. But you need to be aware of the risks associated with a move right now.
Working longer is good for your health
Brian Feroldi: You may not realize it, but staying on the job a little bit longer could not only benefit your wallet, but it may also be good for your overall health, too.
A groundbreaking study was released in 2013 by the Institute of Economic Affairs and it contained some pretty shocking information. The study showed that retirement has a negative impact over the medium and long term on a person's physical and mental health.
Consider some of the findings:
- Retirement increased the chance of developing clinical depression by 40%.
- Retirement increased the likelihood of having a diagnosed physical condition by 60%.
- Retirement decreased the probability of rating yourself as being in "very good" or "excellent" on self-assessed health exam by 40%.
Why is this happening if retirement is suppose to be your chance at living the good life? One likely explanation is working provides us with a strong social outlet that can simply disappear once you retire. That can ultimately lead to boredom, especially for those that lack the means to travel or take up new hobbies.
It's also worth pointing out that working often forces you to use your brain to solve problems, which can be good for your mental health, and for many the daily commute can be a source of forced exercise.
Bigger Social Security checks
Selena Maranjian: One good reason to delay retiring is that you can increase the size of your Social Security checks by doing so. Most of us can collect our full retirement benefits beginning at age 66 or 67, but for every year beyond our full retirement age that we delay starting to collect them (up to age 70), they will increase by about 8%. So by waiting from age 67 to 70, you can make your benefits about 24% bigger!
That's kind of a big deal. Consider, for example, that the average monthly benefit was recently about $1,348 per month, or about $16,000 per year. Increasing that by 24% will result in a $1,672 monthly benefit, or about $20,000 for the year -- a meaningful $4,000 increase.
Here's a significant caveat, though. For those who live lives of average length, delaying retirement to increase monthly checks isn't really worth it. As the Social Security Administration has explained, "If you live to the average life expectancy for someone your age, you will receive about the same amount in lifetime benefits no matter whether you choose to start receiving benefits at age 62, full retirement age, age 70 or any age in between." In other words, for those who live average lifespans, it's pretty much a wash. After all, if you delay until age 70, you'll get bigger checks, but fewer of them -- 36 fewer, if you delay from age 67 to 70. (Note, too, that you can start collecting at age 62. You'll receive smaller checks, but more of them -- and that, too, will essentially be a wash for average lifespan folks.)
Plenty of us stand a good chance of living longer-than-average lives, though, and if you think you might grow extra old, delaying your Social Security checks can be a smart move.
Preserve your savings for a shorter retirement
Dan Caplinger: Basic math is one simple reason why choosing not to retire right now can be a smart move. If you retire early, you end up taking two financial hits: one in the form of not getting an income from work, and the other from the increased expenses that many people see in retirement. Although some experts point to the potential to reduce your costs by retiring, many people find that the pent-up dreams they've had to enjoy their free time result in an increase in what they have to pay.
By contrast, if you're a bit short on retirement savings, working longer beyond your expected retirement age can give you two advantages over those who retire. You can use your salary to cover your immediate expenses, preserving your savings for the future. Also, because you'll be retired for a shorter period of time, you won't need to save as much money in order to preserve your standard of living.
Not being able to retire purely for financial reasons can be a difficult thing to face emotionally, especially if you're ready to quit after a long career. Nevertheless, in order to make sure you have enough financial resources to last throughout your retired years, staying at work can be the best way to ensure your financial security for the long run.
All of the above
The reality is, based on a lot of the financial data that's available, far too few people are really prepared to retire in their mid-60s. Between median retirement savings balances, rising mortgage debt levels for the 50-and-above crowd, and Social Security benefits that could pay substantially more by staying in the workplace a few more years, the financial incentive alone to keep working is pretty significant.
Selena and Dan describe these realities well, and Brian Stoffel does an excellent job pointing out the risks of retiring near a market peak if you don't have a substantial enough nest egg to carry you through a market downturn early in retirement. At the same time, Brian Feroldi's description of the dark side of leaving work, and how it can harm your mental and physical health, is something many retirees never even consider.
But the reality is, these things compound one another. Retiring without the proper financial resources is bad enough. Couple that with the loss of purpose, routine, and social interaction that many retirees don't adequately replace when they leave their jobs, and what started out as a happy, independent retirement can quickly turn into social isolation that's further limited by a fixed, often inadequate income.
So before you retire, make sure you have a big enough margin of safety in your retirement savings, and also consider how you'll replace the lost social engagement and sense of purpose you'll lose when you leave your career behind. You may discover that not retiring -- just yet -- will actually lead to a happier, healthier, and wealthier life.