Working longer means more money overall

Dear Liz: You’ve been answering several questions about when to start Social Security benefits. Most people who talk about the break-even point seem to fixate on when you’ll end up with the most money, but they’re only considering Social Security money. It’s worth pointing out that if one continues to work until full retirement those wages, for most of us, will add up to much more than the reduced Social Security payments for those first four or five years. So unless a person really hates his or her job, or poor health makes the person no longer able to do that job, working until age 66 or 67 will give a person the highest total.

Answer: That’s a good point, and it’s not just the wages you earn that are important. It’s the fact that you can delay tapping your retirement savings, so that those can continue to grow tax deferred. The effect of delaying retirement even a few years is so powerful that people who have saved substantially over their working lives can actually stop saving in their 60s — and use the extra cash for fun stuff like travel — without increasing their risk of running out of money, according to research by mutual fund company T. Rowe Price. The company has dubbed this approach “practice retirement,” and you can read more about it at http://www.troweprice.com/practice.

Most investors under 50 plan to work in retirement

A new T. Rowe Price survey shows seven out of 10 investors aged 21 to 50 plan to work at least part time during their retirement years, and most (75%) will do so because they want to stay active. Only 23% expect to work out of necessity, because they won’t have saved enough.

T. Rowe Price has been surveying the investment practices of Generation X (defined as people aged 35 to 50) and Generation Y (ages 21 to 34).  Harris Interactive conducted the poll in December, surveying 860 adults aged 21-50 who have at least one investment account.

Gens X and Y are following in the path of the Baby Boomers, a majority of whom have told pollsters over the years that they plan to continue to work. The percentages who expect to do so by choice vary with economic conditions, but the polls show a new vision of an active retirement has emerged, said Christine Fahlund, CFP®, senior financial planner with T. Rowe Price.

Continuing to work into your 60s, if you can do so, can have hugely positive effects on your finances as well, even if you cut back on saving for retirement.

From T. Rowe Price’s press release:

“We believe that beginning to incorporate more leisure in your 60s, when you’re still likely to be in good health can be a fun way to make the transition from work to retirement easier,” she added.  “By working a little longer and playing, investors can maintain earned income to fund their activities, hold off on tapping their nest eggs earmarked for retirement, and defer taking Social Security payments.  Delaying Social Security, in particular, positions people to have potentially considerably higher guaranteed payments – adjusted annually for inflation – for the rest of their lives.”

If you want to read more about how you can work longer and have fun, too, read “Retire without quitting your job.”