If people were worried about having enough money for retirement before the pandemic, it's nothing to what they're feeling now. The "great lockdown" has deprived millions of Americans of their normal source of income and many have actually had to tap their retirement savings to cover their living expenses. Some are returning to work to find their companies can no longer afford to offer a 401(k) match, placing the burden of saving enough entirely on their shoulders.
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Yet most people still plan to retire someday, and that means adapting as best as they can to the circumstances. Approximately 26% of workers are now planning to postpone retirement in light of the current economic circumstances, according to a SimplyWise survey. It's a reasonable plan for those who aren't able to save as much as they'd like to right now, but it carries risks. Here are a few things you should know before deciding if this is the right move for you.
How delaying retirement helps you
Delaying retirement offers three benefits in one. It gives you more time to save; the money you've already contributed has extra time to grow before you begin drawing upon it; and you're reducing the length of your retirement and also how much money you need to sustain you for the rest of your life. The combined effect of these three benefits can make a big difference in a relatively short time. Consider the following example.
Let's say you are 35 and plan to retire at 65. You estimate your retirement will last 30 years and you'll need roughly $50,000 per year. For simplicity's sake, let's assume this is all your own money and doesn't include things like Social Security. That means you'd need about $1.5 million to see yourself through retirement.
If you have $100,000 already, contribute $450 per month and your investments earn a 7% average annual rate of return, you'd end up with about $1.27 million by the time you were ready to retire -- a large sum for sure, but not quite enough.
So now let's say you decide that you'll retire at 67 instead of 65. You'd save $450 per month for an extra two years for another $10,800 in contributions, but the real difference would come from investment earnings. You're giving your retirement savings another two years to grow. If they continue to earn an average 7% annual rate of return over that time, the extra $10,800 in your personal contributions and your investment earnings would net you about $1.47 million by the time you finally retired.
You might be thinking that's still not enough, but you're forgetting that you'll now have two fewer years of retirement, which means you can knock $100,000 off of your estimated retirement costs. That brings your total retirement expenses down to $1.4 million, which means you actually have $70,000 to spare.
The pitfalls of expecting to postpone retirement
Delaying retirement can be a great way to shore up your savings, but it doesn't always work out, even if you have every intention of continuing to work when you're older. You could lose your job, become seriously ill, or have to look after a sick family member, forcing you to retire early even if you don't want to.
There's no real way to prepare for this other than to save as much as you can while you're young. Delaying retirement can still be part of your plan, but don't let that lull you into thinking you don't have to prioritize retirement savings right now because you still have plenty of time left. You don't know whether working longer -- especially if you plan to work into your 70s or beyond -- will be feasible.
You should also have a backup plan in case you are forced to retire early. This could involve finding another job if you are still able to work in some capacity. You may be able to get a more flexible part-time job or a job you can do from home. Or you could try cutting some expenses in retirement. This could work if you were planning to travel or make some big-ticket purchases, but it may be less effective if your retirement budget was only the essentials from the start.
Delaying retirement is worth considering if you're worried about not being able to save enough. But you still need to prioritize retirement savings as much as you can while you're young and do what you can to keep yourself healthy and able to work as long as possible.