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Determining when to retire is an important decision, and even pushing it out one year can have a big impact on your finances.
Waiting a year can result in a bigger Social Security payout, in addition to allowing your wealth to compound for longer. Read on for how the decision can affect your money, and potentially make it easier to live your ideal retirement lifestyle.
Higher lifetime earnings
The Social Security Administration bases your payments on your lifetime earnings, or “average indexed monthly earnings.” This is calculated by an average of up to 35 years of your earnings. If you didn’t work 35 years, any years you didn’t work will be counted as zeros. And each of your high-earning years replaces a lower one.
The Administration says that “higher lifetime earnings can mean higher benefits when you retire.”
If you’re earning more near retirement than you were during earlier years of your career — which is the case for most people — it can make sense to work an extra year to replace a lower-earning year.
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Higher payouts from delaying
While you’re allowed to start receiving your Social Security benefits when you hit age 62, waiting can pay off.
You can get your full benefit once you hit your full retirement age, which is between age 66 and 67, depending on when you were born. The Administration’s website has a tool for determining your exact retirement age. But for every year you delay receiving Social Security benefits beyond full retirement age up to age 70, your benefit grows by 8%.
Working even just one more year gives you at least an extra year that you don’t need to tap Social Security. Plus, if you have a higher income from still working, a larger portion of your benefits may be taxable.
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Other benefits to your savings
Social Security aside, an extra year of work gives you more time to build your 401(k) savings, pay off debt and give yourself a better financial buffer for health care and other costs. Working an extra year also means your nest egg doesn’t have to stretch as much, increasing the likelihood that you outlive your portfolio and won’t run out of money.
You should also consider the penalty of early withdrawals from your retirement savings accounts, like your 401(k) and individual retirement account (IRA). If you withdraw money before age 59 ½, there’s typically a 10% tax penalty in addition to federal ordinary income taxes. You may also face state taxes.
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