Did you know that working for just one extra year could have a major impact on your retirement nest egg? Even if you’re determined to retire by a particular date, it’s worth considering how delaying your retirement just a little longer could significantly improve your financial situation during your golden years. Following are some examples of the benefits one year can make:

1. The longer you work, the less you’ll need to withdraw

Working just one extra year will shorten the period of time you’ll have to finance your retirement (which could last two to three decades, depending on the state of your health). During the time you’re still working, you can save more, thus making your savings last longer.

2. The beauty of compound interest

The longer you wait to start withdrawing your retirement savings, the more time that money has to grow and multiply. For example, if you have $250,000 in a retirement account and it earns a 5 percent return during your extra year of working, then that’s an additional $12,500 in your retirement account.

Another reason to work an extra year before retiring is if your investments have taken a dive. That extra time in the workforce could give your investment portfolio a chance to recover before you start withdrawing funds from it. And, even if the market hasn’t improved after that year, you’ll still have saved more money in your retirement account while delaying spending.

3. Opportunity to become a super saver

Going into full force saving mode for an extra year before retirement can make a huge difference. For starters, you could qualify for several different tax breaks. If you are age 50 or older you can take advantage of “catch up” contributions, which allow you to save 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.

Another option is to pay the income tax upfront by saving in a Roth IRA, which will mean you’ll 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.

Also, if your employer provides a match on your 401(k) contributions, you’ll be able to increase your retirement savings even further.

4. Larger Social Security checks

Working one more year can increase your Social Security payments in two different ways. Let me explain:

Social Security payments are calculated using the 35 years in which you earn the highest salary. Chances are, if you work an extra year before retirement, your salary will be higher than it was earlier in your life, which means it will be factored into the calculation and boost your Social Security payments. Also, if you haven’t worked for 35 years, working that extra year could prevent a zero from being averaged into you retirement benefit calculation and reducing your retirement payouts.

The second way working an extra year before retirement could impact your Social Security payments is based on your age. If you start payments before your full retirement age, which is 66 for most baby boomers, monthly payments are reduced. But your payment amount increases if you delay starting benefits after your full retirement age up until age 70.

So, depending on how old you are, delaying your Social Security benefits for one year could increase your future payments by between 6 and 8 percent each year. And remember—that higher benefit will last for the rest of your life!

The bottom line: While it may be tempting to get a head start on your retirement, consider the differences working just one extra year could make on your finances and decide whether it’s worth it to you.

Ron L. Brown, CFP®

Author Ron L. Brown, CFP®

Ron is a CERTIFIED FINANCIAL PLANNER™ and president of R.L. Brown Wealth Management. He specializes in retirement, estate, and business planning for professionals and entrepreneurs. Ron assists his clients with creating a financial plan to ensure they are able to live their ideal lifestyle during retirement and leave a strong legacy for their family. Ron has been featured in The Wall Street Journal, US News, Yahoo Finance, Investopedia, and numerous other high profile financial publications.

More posts by Ron L. Brown, CFP®

Leave a Reply