Delaying retirement by one year increases income by 5%

by Center for Personal Finance editors

SAN FRANCISCO (3/23/06)--A new research report released by the Center for Retirement at Boston College gives preretirees good reason to keep on working. It's estimated that delaying retirement for one year would increase annual income by an average 5% from age 50 onward. Better yet, annual income would increase by 25% just by working an extra five years (MarketWatch.com March 16).

In dollar terms, delaying retirement by one year would generate an additional $1,317 to $2,402 a year, depending on whether 401(k) funds needed to be tapped. The study's authors believe the increase in net wealth, if annuitized at retirement, could increase consumption by 9% a year. In comparison, delaying retirement by five years would yield additional retirement income of $14,888 (56%) a year.

People of modest means likely would benefit more; with one additional year of work, retirement income could increase by 15%, and with five more years of work, retirement income would nearly double.

Benefits would spill over to the Social Security system as well. Although reform still would be required, the added payroll tax from additional work could reduce the size of benefit cuts needed to bolster the system.

Regardless of retirement age, retirement security increasingly requires financial management skills. John Rother, director of policy and strategy at AARP, told American Council on Consumer Interests conference attendees last week that consumers age 65 and older score even lower than the general population on financial knowledge tests. Why? Because of time constraints, complexity of products and services, and low level of financial literacy.

Take action now to boost savings, particularly in tax-advantaged employer-sponsored 401(k) plans and individual retirement accounts. Put your savings on auto-pilot with automatic transfers at your credit union. Calculate your net worth (assets minus liabilities) and track progress on an annual basis.

For more information, read "What's Your Financial Fitness Score?" in the Home & Family Finance Resource Center money savvy section.