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Live for Today, Save for Tomorrow

What if working longer meant more fun, not less, and a bigger nest egg, too?

Come on — decades? Working a few years more can't possibly make that much difference.

Most retirement experts say that it does. The Retirement Policy Center at the Urban Institute, for example, estimates that for every year you work past age 62, you increase your eventual retirement income by an average of 9 percent. At that rate, working eight years longer would double your retirement income. Here's why:

Working longer means your retirement savings need not stretch over so many years. You've probably already heard this longevity riff: A 65-year-old man today has an average life expectancy of 17 years; a woman, 20 years. So you figure, "Okay, if I make it to 65, I will die at 82 or 85."
 
But that's not necessarily correct. Your life expectancy isn't a calculation of when you will die; it's the age at which 50 percent of your age group will still be alive. So if you're 65 today, you've got even odds of making it into your mid-80s and beyond. It's even trickier if you're married. There's a better than 60 percent chance that one spouse of a 65-year-old couple today will still be alive at age 90. In other words, if you don't delay retirement — the average American man leaves the workforce at age 64; the average woman, at 62 — the chances are good that your nest egg will have to stretch for 30 years.

That can spread your savings thin. You can see the effect by plugging numbers into AARP's retirement calculator. Based on AARP's assumptions, a 60-year-old woman making $75,000 a year who retires at age 62 with a nest egg of $250,000 can sustain an annual income of about $31,000 through age 91. That same nest egg could support a healthier income of nearly $41,000 if she didn't touch her savings and delayed retiring until age 70.

You give your savings more time to grow. If you work until age 70, your nest egg will be bigger than at 62 because it has eight more years to incubate. As long as you have a respectable amount saved by 60, letting that money grow undisturbed matters more to your financial security than does your adding new cash each year. If you have $250,000 in your 401(k) at age 60, the 7 percent annual rate of return assumed by T. Rowe Price would add $17,500 to your account in the first year alone. That's probably more than you'd contribute to a 401(k) or IRA. Over 10 years that 7 percent rate would lift your savings from $250,000 up to $500,000 by the time you retire, even if you never saved another penny.

You can delay claiming your Social Security. Individuals can begin receiving benefits as early as age 62. But as the sidebar above shows, you'll lock in a higher payout if you hold off. "People's jaws drop when I tell them how much bigger their benefit will be if they wait," says Sass.

Michael Wilson, a financial planner in Orland, Indiana, notes that the financial crisis makes it crucial to consider delaying. "If your 401(k) tanked, you will be leaning on Social Security even more."

Finally, you reduce your out-of-pocket health care costs. Not many employers still offer retirement health coverage, so if you retire before 65 you may face stiff private insurance costs until Medicare kicks in. "The longer you can hold on to employer health benefits, the more you'll help preserve your retirement savings," says Richard Johnson of the Urban Institute's Retirement Policy Center.

Next: Are there risks to waiting later to save for retirement? >>

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