Saving enough for retirement is difficult, and thousands of Americans today face the prospect of outliving their savings. Boosting your retirement contributions can help you avoid this fate, but not everyone can afford to do so. Fortunately, that's not the only way to close the gap between what you have and what you need.
Delaying your retirement is also an option, and it can make a bigger difference than you think. Putting off your retirement by just three to six months has the same impact as saving 1% more of your salary over 30 years, according to a recent study by the National Bureau of Economic Research. Below, I'll discuss what kind of a difference this can make in your nest egg and other ways you can boost your savings and cut expenses in retirement.
The power of delaying retirement
Delaying your retirement has four key benefits. It enables the money that's already in your retirement accounts to continue growing and it also gives you more time to add to those savings before you need to begin drawing upon the money. If you delay your Social Security benefits for that six months as well, you'll also be entitled to a larger monthly check when you start collecting Social Security, with a typical increase amounting to about 4% as long as you retire at 70 or younger. Finally, because you retire later, you're reducing the amount of time your retirement savings has to last.
To illustrate the effects of a six-month retirement delay, let's imagine you make $50,000 per year and puts away 9% of that salary for retirement. That comes out to about $4,500 per year, or $375 per month. Assuming a 7% rate of return, you would have about $425,000 at the end of 30 years.
If you chose to delay your retirement by six months, you would contribute an additional $2,250 to your retirement savings during that time. Again assuming the same 7% return, the $425,000 you already had would see about $15,000 in additional gains.
This extra $17,250 may not seem like it's equal to an additional 1% savings over 30 years, and that's because it's not. Boosting your savings rate by a percentage point boosts the size of your nest egg by about $48,000. But what you may be forgetting is that you have saved yourself six months' worth of retirement expenses and you've increased your Social Security checks by 4%. If you're fortunate enough to have a reasonably long life, this will add up to thousands of dollars in additional income that will reduce the amount that you need to withdraw from your personal retirement savings. When you factor these things in as well, the idea that a six-month retirement delay could be equivalent to a 1% savings increase over 30 years does not seem so unreasonable.
The results are even more dramatic if you delay your retirement for longer. As long as you don't mind working a few extra months (or years), this is a viable way to boost your retirement savings while simultaneously reducing how much you'll need in retirement. And if you're earning more now than you were in the early days of your career, continuing to work may also boost your Social Security benefits.
Other ways to increase savings and cut retirement expenses
Delaying retirement isn't the right choice for everyone. And for some, it may not be an option if they become sick or disabled and can no longer work. In that case, they'll have to explore other options to make ends meet in retirement.
If you can afford to do so and you expect to have a long life, delaying Social Security is a smart move. You're entitled to 100% of your scheduled benefit at full retirement age -- 66 to 67, depending on when you were born -- but you can receive as much as 124% to 132% of your benefit amount per check if you delay your benefits until age 70. These larger checks will relieve some of the burden of saving for retirement.
You could also look into ways to reduce your expenses in retirement, like downsizing your home, moving to a more affordable town, or traveling less often. Or if you are still able to work, you could work part time, so you can still enjoy some of the freedoms of retirement while earning money at the same time.
If you're only coming up a little short of your retirement savings goal, then delaying retirement by a few months is a simple way to correct the problem. It may not be ideal, but it certainly beats running out of money in retirement.