Running out of money in retirement is a significant concern. Additionally, many workers in their 50s and 60s are behind on their savings. It is clear that many people are not prepared for retirement.
There are several options that can be employed to boost retirement income. A popular tactic is to increase the savings rate during the tail end of the working years. However, those who would like to most effectively raise their retirement income may have to work longer than expected.
According to the National Bureau of Economic Research, working a few extra years has a bigger impact on boosting retirement income for older workers than increasing retirement plan contributions during their last decade of work.
There are multiple benefits to working longer that makes it a good strategy to boosting retirement income. The longer people work, the more opportunities they have to contribute to their nest egg. Workers over the age of 50, can contribute up to $24,500 annually to a 401(k) and $6,500 to an IRA.
For example, someone who is 67 extends his/her career by three years and wants to max out their 401(k) during that time will add $77,200 in retirement income if the investments deliver a 5 percent return. This is a more effective tactic than boosting the savings rate at the tail end of one’s career.
If the plan is to retire at 76, then at the age of 57, increase the retirement contributions by $200 a month for 10 years. If the investments deliver a 7 percent return during that period. This will add $33,200 more to the retirement fund. Working three extra years and maxing out a 401(k) will have a significantly better result as the retiree is coming out $44,000 ahead.
There are countless scenarios to experiment with. However, working longer may be the best way to boost retirement income. Adding a few years in the workplace increases retirement finding and allows people to wait before withdrawing money from their savings account, thus, giving the money more time to accrue interest. Furthermore, working longer may allow people to boost their Social Security benefits, securing a higher income stream for life.
Each year, after retirement age, a person can wait to apply for Social Security benefits, there is an 8 percent boost that will be added to the Social Security payments that will remain in effect for as long as the benefits are collected.
For example, if the desired retirement age is 67 the average recipient will receive $1,400 in benefits. If one works until the age of 70 the monthly payments increase to $1,736, which is an additional $80,640 over a 20-year retirement period.
By Jeanette Smith
CNN Money: The best way to boost retirement income
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