Should You Delay Retirement One Year?


This year hasn’t been a fun one for the market. Seeing retirement accounts plummet would cause any soon-to-be retiree to wonder if they should delay retirement one more year to let their investments recover. Of course, the answer is, “It depends”. Today, we examine two scenarios: one where delaying retirement makes a big difference, and one where it helps only marginally.

Reasons to Delay Retirement

We all know intuitively that delaying retirement will make things easier on our investments. However, it’s hard to know how much of a difference it will make – and if that difference is worth putting up with another year of work.

Obviously, you’ll have one more year to add to your retirement accounts (including any employer match that’s available). If you’re maxing out your retirement savings, that ends up being up to another $27,000 in contributions plus any employer match in 2022. That’s a nice addition for just one year.

You’re also not dipping into your investments during this time. So, while you’re adding to your accounts, you’re also not reducing them by taking withdrawals for living expenses. Therefore, the true difference between retiring and delaying retirement one year ends up being the sum of your savings during that year plus the amount you would have taken out to pay the bills.

Finally, if you haven’t yet reached age 65, delaying retirement can drastically reduce your healthcare expenses. If you’re deciding between retiring at 64 and at 65, then the difference between private health insurance premiums and Medicare premiums may be enough to convince you to stay at work another year.

This all makes sense. But how much of a difference will it make? Let’s look at an example.

Scenario 1: The Numbers Are Close

For our two scenarios, let’s imagine a hypothetical couple, Steve and Suzie. Steve and Suzie are both 63 years old and want to spend $8,000 per month in retirement in addition to healthcare and long-term care expenses.

In our first scenario, Steve and Suzie saved $1.6 million in their retirement portfolio that’s invested in the traditional 60/40 allocation. Because they’re already 63 years old, we’ll assume that they apply for Social Security when they retire.

When we run a Monte Carlo analysis for Steve and Suzie, we find that they only have a 56% probability of success if they were to retire today. They may be able to make that work, however, those odds might be too low for comfort. The whole point of retirement is that you’re less stressed than during your working years, right? In this case, they’ll likely need to lower their retirement living expenses at some point to make it work.

However, if Steve and Suzie delay retirement one year to age 64, we find that their Monte Carlo probability of success jumps from 56% to 69%. That’s a big increase in their odds from delaying retirement just one year. I’m certainly more comfortable with their chances closer to 70% than 50%.

Typically, I like to see Monte Carlo probabilities of success somewhere between 70% and 90%. If they’re much below 70%, that indicates that they’re likely to have to cut their spending at some point during retirement. If their probabilities are above 90%, then they may not be enjoying the money they’ve worked so hard to save.

So, what does delaying retirement a year do for Steve and Suzie? If they wait until they’re both 65 and can go directly to Medicare, their probability of retirement success jumps from 69% to 81%. Now they’re in a very comfortable position. Delaying two years from today results in jumping from a 56% chance of success all the way to 81%.

In a scenario like this one, where Steve and Suzie’s numbers aren’t quite comfortable, it’s clear that delaying even one year will make a significant difference.

Scenario 2: Already in Great Shape

What if Steve and Suzie already have strong a probability of retirement success? Does it make sense for them to delay retirement another year?

In our second scenario, we assume everything’s the same – except this time, they’ve saved $2.1 million instead of $1.6 million.

In this case, if Steve and Suzie retire right now at age 63, they’ll have an 85% probability of retirement success. They’re in great shape to retire right now if they want.

However, even though they’re in a strong financial position, Steve and Suzie are a bit nervous about the market being down. Will waiting one more year make a difference in their plans? If they wait one year and retire at age 64, their probability of success increases from 85% to 91%. While that’s a nice increase, it simply takes them from “comfortable” to “slightly more comfortable”.

How much will their odds improve if they delay one additional year to age 65? If they delay another year, they increase their probability of success from 91% to 96%. Is this marginal increase in their odds of success worth staying another year at work? At this point, I think it’s a question of how passionate they are about work and does that passion outweigh everything they would otherwise enjoy during retirement.

Should You Delay Retirement?

Some people love their work, so I certainly wouldn’t want to dissuade anyone from staying another year if it brings them joy and meaning. However, I know many folks would be just fine leaving work tomorrow and never coming back.

If your financial plan tells you that your probability of retirement success is already very strong, waiting a year becomes more of a matter of choice than a matter of need. It does increase your probability of success, but not nearly as meaningfully as if the numbers were a little tight.

If you’re interested in increasing your probability of retirement success, then click here to set up a quick, complimentary introduction call to see if Prana Wealth is a good fit. We do still have the capacity to take on new clients.

As a fee-only financial advisor in Atlanta, we can (and do) work virtually with clients all across the U.S. and we’re here to help you when you’re ready.

The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but is intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax, or financial advice. Please consult a legal, tax, or financial professional for information specific to your individual situation.
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