For many people, retirement is a lifelong dream. They can’t wait to start sleeping in, traveling and spending time with their families. There’s always the wonder – what happens if I delay retirement by one year? How much of a financial impact would it have if you continued to work one year longer than you had intended? Or the converse crosses your mind – what would happen if I retired a year earlier than I planned? There are multiple ways that retiring either sooner or later than planned can impact your life, beyond just your retirement income.
An obvious impact of delaying retirement means that you’d have an extra year of income coming in – and not only that, but likely an extra year of a high-earning income as you may be at the top of your career. If you check into retirement a year early, that’s a year of income that you’re giving up. Delaying retirement by one year gives you a year of this extra income, which can be useful if you’re planning on a big expense, such as an upcoming wedding, house remodel, or even a new car. Padding in that extra year of income gives you a bit of cushioning to fund any big expenses you may have coming with room to spare.
While your last few years of work are generally your highest earning years, they’re also the years that you’re most likely to save your money as well. Often, your children have left the home and you may have a mortgage paid off, so you have the ability to save the extra money that you’re earning. If you delay retirement by a year here, you can significantly increase your savings. If you dive deep into retirement early, you’ll miss out on the income and the potential to save it as well. This is particularly useful if you’re underfunded in your retirement accounts early in life, you have the option to make up for some of that by overfunding it in the last few years of working.
Once you retire and stop bringing in income, you start drawing down on your investment accounts. By deferring your retirement a year, you defer that drawdown by a year as well. If you decide to retire early, you need to build in an additional year of drawdown instead, so that if you’d plan for living off of 30 years on your assets, you’d now need to live on 31. Deferring or adding to your drawdown amounts can have an immense effect on your retirement.
The more time interest has, the more it will compound. It stands to reason then, that by deferring retirement and not touching your investments for another year, you’ll let that compounding continue to work for the full extra year. On the flip side, if you retire early, you’ll miss our on that extra year of compounding at the full amount of your investments. This factor alone can be a significant difference in your retirement, especially if the market is doing well and you’re making a decent amount of interest within your accounts.
While many people retire in their 60s and take their Social Security right away, there may be benefits to delaying both retirement and taking Social Security Benefits. By continuing to work another year, your Social Security benefits will be determined based upon your most recent earnings, which are likely high level earnings. For each year that you wait, your benefits may be as much as 8% higher for life. This results in a higher fixed income for retirement when your paycheck is no longer arriving every two weeks.
Delaying retirement isn’t the right fit for everyone, even if there are potential financial benefits. Talking to a financial advisor is the best way to determine if you’re prepared for retirement and to learn when the best time to retire is for you and your specific situation.