Getting Your Financial Ducks In A Row

The question of delaying retirement may arise as you get closer to your “goal year” of when you want to retire. For some individuals’ fortunate enough to be covered under a company or state pension, it can be tempting to retire as soon as possible and collect the pension benefit. The same may be true for folks wanting to start taking Social Security at age 62.

Before making the decision to retire or retire early an individual should consider the effects on delaying retirement and continuing to work. This is assuming that they can accrue extra pension benefits for the extra years of service. For Social Security, this would be delaying past an individual’s normal retirement age as long as to age 70.

For example, let’s say an individual has the opportunity to be eligible to retire at age 55 and receive a pension of $5,500 per month. However, if the individual decides to wait until age 60 to retire their pension will increase to $7,500 per month, a difference of $2,000 or $24,000 per year.

Recently, I had just such a scenario presented to me. The individual came to me with the above retirement ages and pension amounts and asked which one I recommended. My response seemed to throw them off. I asked them what would make them the happiest. We then dove into possible scenarios and future goals they wanted to achieve.

After about an hour of conversation the individual decided to delay retirement in exchange for the extra benefit. The reasons were that they were still young enough to re-enter the workforce doing something else, but they would always have the $7,500 coming in. f they chose to work at another job, the extra income was gravy. However, they also felt happiest with their decision based on if they didn’t want to work another job; they would have enough income to not work if they chose.

The same thing can be done if a person delays their Social Security benefit past their normal retirement age. Delaying Social Security can increase the benefit by as much as 8% per year.

Essentially what we’re doing by delaying the pension and Social Security is increasing the income floor. Think of an income floor as a guaranteed stream of income that will never decrease throughout your lifetime. In other words, no matter what happens to the stock market, your future job (after retirement), or the economy, the income floor represents income that will never go away.

Think of it this way. If an individual needs approximately $5,000 per month for expenses in retirement and they have an income floor (from pension and or Social Security) of $3,000 then they only need to find $2,000 per month from other income sources such as employment or retirement savings in a 401k or IRA. The individual may also create their own income floor by purchasing longevity insurance (annuities) with some of their retirement savings. If their floor is exactly $5,000 their income matches their expenses. A floor higher than $5,000 and they have a surplus – a good situation to be in (and also less stressful).

The decision of whether or not to delay retirement should be carefully considered. Talk to a competent financial professional to see if you may be leaving money on the table. Look at your recent Social Security statement to see how much your benefit increases by delaying or talk to your HR department (if you have a pension) to get an estimate of your benefit should you decide to delay retiring.