Work longer, retire richer

In my forties and fifties, my friends and I assumed we'd all retire at 65. Didn't everybody?

Then, still going full tilt in my early sixties, I thought retiring at 65 seemed too early. Yet data shows most American workers retire at 63 or 64, and we can claim Social Security benefits at 62. So what is the right age to retire?


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Now at 77, I'm still putting in a 60- to 70-hour workweek and am glad I didn't stop working at 62 or at 65, partly because I like being productive and partly because of the powerful economic benefits of working longer.

Only as I reached my 60s and 70s did I realize how powerful those incentives are. No one explains the case to most workers. The longer you wait to retire, the wealthier and more secure you will be. Even a year or two makes a difference.

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When a worker keeps working for the eight more years between 62 and 70—an increase in total working years of 20 percent for someone who started to work at 22—Social Security payouts are increased every year by a full 76 percent. That's right: 76 percent more for 20 percent more time.

That's not all. For those corporate workers with a 401(k) retirement plan, working until 70 will likely double 401(k) benefits. Let's do the math.

To make it easy, let's contrast 401(k) payouts for those who retire at 62 with payouts for those who retire at 70. (Of course, market returns are uncertain, so those numbers are necessarily based on sensible probabilities.) The worker who decides to continue working to 70 puts in eight more years. This means …

  • Eight more years of contributions going into the 401(k).
  • Eight years of not drawing money out of the 401(k)'s accumulated savings.
  • Eight more years of investment returns on the assets in the 401(k).

For the average American worker, here is what can be expected for the typical working household who, we know from the data, currently has only $110,000 in combined 401(k)/IRA assets and annual earnings of about $75,000. (Average earnings for all American households is about $50,000, but for those approaching retirement, earnings average $75,000. Since living expenses tend to drop in our sixties and early seventies, our sixties is a very good time for extra savings—before the increasing costs of health care in our late seventies and eighties.)

  • •At a 12 percent rate of savings, annual contributions into the fund of $9,000 x 8 years = $72,000.
  • •Not taking 4 percent annual withdrawals from the fund: $4,400 x 8 years = $35,200.
  • •Investment returns added—assuming a 60:40 portfolio of stocks and bonds—earning a rate of 6 percent per year = $71,040.

The total of these add-ons would increase the savings of this representative worker by $178,240, more than doubling her 401(k) fund and, of course, more than doubling her annual payouts in retirement.

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Add the 76 percent increase in Social Security payouts and the more than 100 percent increase in 401(k) payouts and our representative retiree has $12,300 each year from his 401(k) to add to the additional funds from Social Security.

The increase in annual payouts during retirement would make a positive difference—the difference between "too little" and "enough"—for millions of American workers during their years in retirement.

Nothing's perfect, particularly in life and investing, but by deciding to work for eight more years, the representative American worker puts herself or himself into a much better financial position for a decent retirement. Anyone who is not sure about adding eight more years can take the decision to work longer one year at a time—with each additional year producing an 8 percent "annual raise" from Social Security, plus an average increase in annual 401(k) payouts of nearly $6,000.

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Why don't most people know about this soon enough to plan? Good question. Americans who run out of money after they've retired—when it's much harder to get back into the workforce—may understandably be asking tough questions that will be hard to answer. Questions like: "You could see what was coming. Why the @#!* didn't you tell me?"

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The best thing we can do now is to help each and every worker see for herself what her choices really are and what the financial consequences of each choice will be. Given the facts, most of our fellow citizens will want to make this choice: Continue working for 20 percent more years to get up to 100 percent more during each year in retirement. Every American worker deserves to know the facts so he or she can make an informed free choice.

Charles D. Ellis, Ph.D., is a leading investment consultant and the co-author of "Falling Short" with Alicia H. Munnell and Andrew D. Eschtruth of the Center for Retirement Research at Boston College.