Should I Work 5 More Years—or Retire?

You always knew retirement was coming. But now, seemingly suddenly, the end of your work days are in the not-too-distant future, an actual event you can foresee. 

As of 2021, the U.S. Census Bureau reports that men retire at the average age of 65 and women at 63. But no one’s life is an average. After all, many Americans would like to retire young, others can’t imagine not working and some need to work as long as possible. So ultimately, your retirement date isn’t a question based on age—or even having a certain amount in the bank. It’s entirely personal to you, and how you plan to live in retirement. 

If you’re debating retirement in the next five years—versus the next year—here’s how to evaluate your retirement plan so far, to see if you're ready.

Can you support your lifestyle?
First, take a realistic look at how much money you’ll need to live the lifestyle you’d like to enjoy in retirement. You’ve likely spent decades thinking about a retirement “savings” plan, but now it’s time to create a realistic “spending” plan, says Christopher M. Moore, director of financial readiness at Texas A&M’s financial planning program. Moore says that small change can put you in the right mindset, shifting your thinking in a valuable way. “Changing that one word—from ‘saving’ to ‘spending’—helps people visualize what they’re trying to accomplish,” Moore says. 

Moore recommends working with a financial advisor to calculate an accurate wage replacement ratio. That term simply refers to how much of your current income you’ll need in retirement. The rule of thumb is that you’ll need about 70% to 80% of your current annual income each year in retirement. Factor in inflation over the decades of your retirement as well. Consider your current monthly expenses and see which ones will and won’t carry over into retirement. 

Have you factored in all your income streams?
Once you estimate how much money you’ll need, add up anticipated income streams—including Social Security benefits, pension payments, 401(k)s, 403(b)s, IRAs, plus any other savings and investments. Although you’ll be eligible for Social Security at 62, waiting past full retirement age of 66 until age 70 can result in as much as 8% more in retirement benefits each year you wait. If your savings and income streams don’t match your goal, it’s clearly not time to think about retirement yet.

Age can typically come with medical expenses you didn’t have before, and Medicare retirement benefits could assist in paying for those bills.

Are you prepared to cover large expenses?
You earned your retirement! If you want to spend more time vacationing or pick up a hobby, consider how that will affect your current pool of retirement savings. If you can’t afford to cover basic living expenses and enjoy retirement, you may want to consider working for a few more years.

On the flip side, you should still have money set aside in an emergency fund for unexpected expenses such as auto repairs, medical bills, etc. 

Will you still have a mortgage?
Moore encourages pre-retirees to pay off a home mortgage before they stop working completely. Because your living expenses are often one of the largest line items in your budget, freeing yourself of that payment each month will free up funds for other needs or wants. There's also future potential interest you may have to pay on debt that would eat up retirement savings. If you haven’t knocked out that debt, Moore says it’s not time to stop working yet. You can also consider downsizing, which would allow you to tap into the equity in your current mortgage.

You should also consider other types of debt you may have incurred, such as credit card debt or auto loans.

How much could you save in five extra years?
Moore requires his students to build scenarios to show how working longer can affect retirement savings. Consider the following, which shows how clearly working five or 10 more years can be exponentially more lucrative in the long term.

At age 36, a worker makes $100,000 and contributes 3% of his income to a 401(k) that already has a balance of about $114,000. His company offers a 5% match and he gets an 8% annual return on his investment, plus a steady 3% raise every year. If he keeps making his contributions, here’s how his balance can potentially grow:
●    Age 60: $1.96 million
●    Age 65: $3.04 million. 
●    Age 70: $4.67 million.

Remember that your 401(k) is just one retirement account. If your personal finance plan includes multiple retirement accounts as well as general savings accounts, mutual funds, and investment portfolios, your final retirement savings could be even larger if you work as long as possible.

Compare your savings to how much the average person has saved at your age.

Would you miss out on catch-up contributions?
The government offers catch-up contribution options for most retirement accounts for those approaching retirement age. Usually, at age 50 you will qualify to put more money away into tax-deferred accounts. If you are thinking about retiring this year, you may want to consider how working five more years could be beneficial for your taxes. Max out your 401(k) and rake in company matching funds. If you don’t have an IRA, open one and contribute the max allowed.