Another Reason to Consider Postponing Retirement

The previous post explained why it makes sense to try to wait out a down market before withdrawing money from your retirement accounts. But wait, there are even more benefits to waiting--literally.

According to a 2006 study by the Employee Benefit Research Institute (EBRI), people 65 and older get about 40% of their income from Social Security benefits. Waiting a few years to start those benefits can significantly increase monthly Social Security payments. For example, Ethel earned $50,000 a year before retirement and just retired at 65. Using the Social Security Administration's online calculator (http://www.socialsecurity.gov/OACT/quickcalc/index.html), Ethel would initially receive $1,187 a month from Social Security. By waiting until she reaches 68, her monthly benefit increases to $1,694 a month. That 43% increase comes in part from delaying the start of benefits (about 9% per year) and cost of living adjustments (on average about 2.7% per year).

The monthly payment you receive when you start receiving benefits is the basis for your payments for the rest of your life. But, you have to choose between receive lower monthly payments for a longer period or higher monthly payments for a shorter period. If your family tree foretells a shorter life span, it might make sense to start your benefits right away. But, after a decade, the cumulative benefits from a higher monthly payment exceed the smaller payments started earlier. If Ethel started her benefits at 65, she would receive approximately $696,000 from Social Security by age 95. If she waited until she turned 68, her cumulative benefits would be $853,000 at age 95.

The Social Security Administration has a new online calculator that uses your Social Security earnings to estimate your benefits. You can even play what-if games with different earnings and retirement ages. Go to http://www.ssa.gov/estimator/ to try it out.

Combining all these income factors adds up to serious money. If Ethel retired at 65 with her portfolio down at $400,000, her annual income would be about $33,900 ($18,660 from her portfolio and $14,244 from Social Security). If she waited 3 years, continued her 15% 401(k) contribution, and her portfolio recovered to her $500,000 target, her annual retirement income hits approximately $49,100, a 45% increase.