How to Decide When to Retire

Editor's Note: This story originally appeared on NewRetirement.

In some cases a year can make a huge difference. Think back to 2019. It was certainly different than 2020 (to say the least).

But sometimes years go by and not all that much has changed. Deciding when to retire is a huge commitment. It can be easy to put it off a year and then again another year.

Do those years really make a difference in the grand scheme of things?

The answer largely depends on your perspective, but the answer is yes. Our choices about when to retire — even waiting just a year — impact both our financial as well as our emotional well-being.

Current and Future Value of Your Decision

When figuring out when to retire, you need to think about both the present and your future. What does delaying retirement net you now? What does it mean to your future?

For example: If you retire earlier, can you still afford your future? If you delay retirement, can you be more financially secure without regretting the extra year working?

But, with regard to time, will something happen (an illness or birth of a grandchild) to make your decision to retire earlier more meaningful?

Let’s take a look at what the real differences are when you delay your retirement one year. What about if you wait another five years or longer?

Factors Besides Time and Money

The two most often talked about factors for deciding when to retire are time and money. And, we’ll talk about those.

However, there are other considerations (emotions) that may be driving you to a too-early retirement or keeping you from living the life you really crave:

• For some people the lure of making and saving more money is hard to overcome. These are people who may be apt to save too much.
• Others may have a real terror of spending their retirement savings.
• A fair number of people are retiring to get away from a job they hate, but what is really important is retiring to a life you are going to love.

When selecting a retirement date, be sure to consider your emotional factors, whatever they are.

What Financial Difference Does a Year Make When Selecting Your Retirement Date?

Here, we’ll try to put a dollar value on delaying retirement a year.

1. Your Time

Your time is your most valuable resource. And, let’s face it, how you spend your time gets increasingly more important as you age. You have fewer years ahead of you and you want to make the best use of them.

You should probably consider time as an important component in your when-to-retire decision-making. What does delaying retirement for a year or more mean if you value your time?

If you are happy, fulfilled, and are finding meaning in work, then there is probably no need to rush to retirement.

However, if there are other ways to spend your time that you think are more important, then you might want to prioritize retirement sooner rather than later.

How to Think About Time, Your Scarcest Resource

Ashley Whillans, an assistant professor at Harvard Business School, writes about how to think about and value your scarcest resource, your time, in her book, “Time Smart: How to Reclaim Your Time and Live a Happier Life.”

She became interested in the value of time after observing that people don’t spend money for optimum happiness.

Here is what she said on the NewRetirement podcast, “If people are not spending one resource that’s so precious in our lives, money, in a way that promotes happiness, I’m sure that they’re probably not optimizing the way they spend their time, either. And we also became really interested in trying to understand the trade-offs that we make between time and money.”

She advocates taking time seriously. “So I do hear from a lot of my MBAs, a lot of the executives I chat with, saying, ‘Well, once I get this title, once I hit this number in the bank, then I can start focusing on what I would like to do with my time. But it’s not until I achieve this title or achieve this amount of money in the bank that I’m really going to take time seriously.'”

How do you value your time? How can you use that valuation to inform your decision of when to retire?

• Cost of delaying retirement a year: Uncalculable but potentially very costly. Time is priceless.

2. Your Pension, if Applicable

If you have a pension, waiting a year can make a HUGE difference between vesting into income or not. For most pension holders, when you qualify for income is the most pivotal factor for when to retire.

This could be a million-dollar decision. So really, the best advice is to not retire before you qualify for your full pension.

(The other big decision is whether you take your pension as a lump sum or as payments.)

• Cost of Delaying Retirement a Year: It could be a lot.

3. Social Security: A Decision That Lasts Longer Than a Year

There are a few considerations to think about with regards to delaying retirement and what that means for your Social Security retirement income.

First, you can retire from work and still delay the start of Social Security. And if this is your decision, then when you retire might not have appreciable financial considerations.

However, if you need to start Social Security right away after you retire and you haven’t yet turned 70, then you may take a financial hit.

Depending on your Social Security earnings and how long you live, the difference between starting Social Security at age 62 and age 70 can be a $500,000 decision in overall lifetime value.

But, what is the difference of delaying the start of Social Security for just one year?

Examples

Higher Earner: Let’s say you are a relatively high earner and will be earning the maximum Social Security benefit available. If this is true, then your monthly benefit at your Full Retirement Age (66 for most people) would be around $3,100.

If you were to delay for a year, until 67. then you could boost your monthly benefit to around $3,300. That is a $200 monthly and a $2,400 a year difference. The boost would result in almost an extra $50,000 over a 20-year retirement.

Average Earner: What about someone more average? Does delaying a year still make a big difference? The average Social Security benefit at Full Retirement Age is $1,500.

Delaying the start for two years boosts monthly income by an extra $200. That is a $ 2,400-a-year difference and would result in an extra $48,000 over a 20-year retirement.

So, delaying retirement a year can indeed make a big difference in Social Security income because it is a decision that impacts you not just in one year, but over your lifetime.

• Cost of Delaying Retirement a Year: $48,000

4. Work Income (and Related Expenses, Savings, and Needed Withdrawals)

Retirement and retirement planning depend on a variety of inter-related levers: your income, expenses, how much you save, and how much you withdraw from savings will all be impacted by whether or not you have work income.

Here are some estimates of what delaying retirement by a year might mean with regards to work income.

Work Income

Let’s start with the obvious. Delaying retirement gives you an extra year of income. And that is no small chunk of change at probably $50,000 or more, perhaps much more.

Retiring early simply means that you aren’t banking that money or are able to use it for living expenses (and you need to pay for life somehow).

• Cost of a Delaying Retirement a Year: $50,000 or more.

Withdrawals

Work income enables you to delay making withdrawals to cover expenses. And, this delay enables the money to stay invested and continue to grow.

So, the value of delaying a year can be equal to whatever you would have taken out of savings PLUS your returns on that money.

Many people withdraw about 4% of their savings a year (review 18 of the best withdrawal and retirement income strategies) and the average retirement savings for someone in their 60s is around $200,000.

• Gain of Delaying Retirement a Year: So, with those averages, delaying that withdrawal for a year would net you $8,000 plus however much your money might appreciate. (The appreciation might be $1,500 over 20 years assuming a 6% return.)

Expenses

When you are working, you might have higher (or lower) expenses than when you retire — depending on your personal situation.

You’ll want to think about commuting costs, lunches out, fancy coffee on your way to work and your wardrobe. And, if you choose to retire, you’ll want to carefully consider if your expenses will go up or down. Many people find that they spend a lot more after retirement.

However, the biggest potential factor with regards to expenses and when to retire might be where you live. If you intend to relocate after retirement, this can be a pretty massive financial factor.

Buying and selling a home is a big decision and timing those transactions can mean big swings in value.

Expenses can’t be easily generalized — delaying retirement a year might result in a higher or lower burn rate. So, let’s just call it even. (But we really recommend that if you are considering when to retire, do detailed personalized planning so that you can feel confident with your decision.)

• Cost or Expense of Delaying Retirement a Year: Unknown, very dependent on your plans.

Savings

First, do you know how much savings you need to have the retirement you want? If you don’t have enough and an extra year or more in the workforce could get you there, then keep working.

But maybe you want extra cushion or to leave behind a bigger financial legacy. Working longer could potentially enable you to contribute greatly to savings.

Extra savings — especially if you are able to do catch-up savings — can be a great use of an extra year in the workforce.

In the 2024 tax year, you are allowed to save up to $30,500 per year in tax-advantaged accounts after the age of 50. (And, if you didn’t need to tap those funds for another 15 years, the $30,500 could grow to over $73,000 if left to compound at a 6% rate of return.)

• Cost of Delaying Retirement a Year: $73,000

Work Benefits

Many workplaces offer benefits in addition to salary. Health insurance and 401(k) matching are notable big-ticket items that should be considered if debating if you should delay retirement a year.

If you are retiring before you are eligible for Medicare at 65, then you may face huge out-of-pocket insurance costs. And, if your employer offers 401(k) matching, then you will be walking away from that cash.

Health Insurance: Fidelity estimates that out-of-pocket costs for health care are just above $12,000 a year.

401(k) Matching: The most common employer match is 50 cents on the dollar of up to 6% of your salary. So, at a $150,000 salary, an employer might be adding $4,500 to your retirement account (assuming you saved at least $9,000).

• Cost of Delaying Retirement a Year: $12,000 + $4,500 = $16,500

So, Does Delaying Retirement by a Year Really Make a Big Difference?

Yes. Delaying retirement by just one year can be financially meaningful. But, the reality is entirely dependent on your personal situation.

• Social Security: A year could mean a $0 to $500,000 difference. Let’s take the modest example and say it costs you $50,000 (assuming you start benefits early).
• Pension: (Because few people have a pension these days, and almost no one would retire before they vest, we’ll leave it out of this summation.)
• Work Income: $50,000+
• Work Benefits: $16,500 ($12,000 for health insurance and $4,500 for employer match)
• Delayed Savings Withdrawals: $8,000+
• Savings Contributions: $73,000 (if you can max out catch-up contributions and delay withdrawing the funds for 15 years)
• Your Time: As the TV commercial used to say, PRICELESS

Total Value of Delaying Retirement a Year

There is a huge range for what delaying your retirement for just one year might cost you — but it is safe to say that $100,000-$200,000 is a conservative estimate, except that your time really is priceless.

At a minimum, it has some value to you that should offset whatever you might gain from working longer.

And, don’t forget that if you can retire somewhere less expensive, you may more than make up for the other costs of an early retirement.

Deciding When to Retire? Set a Date That’s Meaningful to You and Your Goals (Bend Your Finances to Make It Work)

There is no correct time to retire. This is a big life choice like getting married or having kids that is yours to make.

Use the NewRetirement Planner to run scenarios for what delaying retirement a year — or moving it up five years — might mean to you.

Just remember to balance the financial side of the equation with how you really want to be spending time.