It's not a good feeling when you know you're not saving as much for retirement as you'd planned. It's sometimes possible to remedy the situation by increasing your monthly contributions, but often, those who aren't saving enough can't afford to do this. Fortunately, that's not the only way to fix the problem.
Working longer can also help you shore up a savings shortfall. Here are four reasons why.
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1. It gives you more time to save
Working longer gives you additional time to save for retirement. Even if you only delay your retirement by a few months, it could enable you to bank several hundred or even a few thousand dollars for your future. This could help cover a few months of living expenses in retirement.
2. It'll give your investments more time to grow
Most people don't need to save every dime they'll need for retirement expenses on their own because they invest their money.There's a risk of loss associated with this, but many investors make a handsome profit if they sell their investments for more than they purchased them for.
Over the long term, the stock market has averaged about a 10% average annual rate of return. This can make a pretty substantial difference to your nest egg, especially if you already have tens or hundreds of thousands in your retirement accounts. Delaying retirement gives you a chance to hold your investments longer so they can grow even more before you have to sell them to cover living costs.
3. It reduces the length of your retirement
Working longer means your retirement is shorter, and a shorter retirement will likely be cheaper than a longer one. Again, even a few months can make a difference here. Every month you remain in the workforce shaves thousands of dollars off your total retirement expenses.
4. It could increase your Social Security benefit
Your Social Security benefit is based on your average monthly income during your 35 highest-earning years, adjusted for inflation. Though it's not always the case, many who work longer than 35 years see their monthly benefit grow.
This is because most people earn more later in their careers than they did when they were starting out. After they pass the 35-year mark, the government removes these earlier, lower-earning years from their benefit calculations and replaces them with more recent, higher-earning years. This, in turn, raises their benefit.
Larger Social Security checks could reduce the strain on your personal savings and enable you to get by with a smaller nest egg. However, Social Security will probably never be enough to cover all your retirement expenses, so you still need to prioritize personal savings at every age.
Have a backup plan
Working longer can make a huge difference to your retirement savings if you're able to pull it off, but things don't always go according to plan. Some people want to work longer but are forced to retire due to health issues, caretaking requirements, or job losses. Taking steps to keep yourself healthy and your job skills current may reduce these risks but probably won't eliminate them.
So it doesn't hurt to have a backup plan for what you'll do if you have to leave your job sooner than expected. If you lose your job or have to remain close to home to care for family, you could seek a new, more flexible job. Many employers now offer remote positions you can do from anywhere.
You may also have to plan to cut back spending in retirement or seek out additional sources of income. You could apply for supplemental security income (SSI) if you think you'll qualify. Your state or local government may also provide assistance with things like food, housing, and medical care for seniors.
This may not be ideal -- and delaying retirement might not be, either -- but it could save you from the serious financial hardship you'd face if you retire with little to no savings. Take some time to weigh whether delaying retirement is a good choice for you. If it is, decide how long you plan to continue working. Then, set new savings goals based on your updated retirement date.
