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Should I work one more year?

The average American household spends $6,440 a month (or $77,280 a year) on living expenses, including housing, transportation, food, insurance, health care and entertainment, according to the most recent Consumer Expenditure Survey from the U.S. Bureau of Labor Statistics (BLS). However, if you’ve already paid off your mortgage, your expenses may be significantly less than the national average.

Let’s say, for example, you expect to live off $4,000 a month in retirement. On top of your living expenses, you want to account for things such as travel, hobbies and entertainment — let’s allot $2,000 a month — and, of course, a cushion for out-of-pocket medical expenses — let’s suppose $500 a month, in your retirement budget.

That means you’ll need an annual retirement income of $78,000 a year (or $6,500 a month). However, you’ll also need to account for inflation throughout retirement — you can expect your living expenses and medical costs to go up over time.

If you work one extra year, you’ll be able to put more money into savings. Say, for example, you max out your 401(k) at work; if your employer matches your contributions, you can further boost those savings. You also have one more year to grow your investment portfolio before drawing it down in retirement. Staying invested longer is one way to hedge inflation.

Plus, if you keep working and delay your Social Security retirement benefit by a year, you’ll receive delayed retirement credits, which provide an 8% increase in monthly benefits for each year you delay after FRA.

That means, if your benefit is $2,800 at FRA, you’ll get a permanent bump of 8% each year you delay until age 70 (the latest you can claim). So, if you delay for a year after your FRA, you’ll get a monthly check of $3,024. If you delay until 70, that jumps to $3,472. That’s more than half of your total monthly budget of $6,500 — before you factor in your personal retirement savings.

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What else should I consider?

You can estimate how much you’d be able to withdraw each month in retirement by working with a financial adviser or using retirement planning tools. For example, using this calculator, you could estimate how long your retirement savings will last if you have $1.5 million in savings and a life expectancy of 95, assuming an average investment return of 6% and an annual inflation rate of 3%.

Based on those assumptions, the amount you could withdraw monthly at age 67 — increasing 3% annually to adjust for inflation and to maintain your purchasing power — is $6,572. If you retire one year later, at age 68, and continue to invest $500 a month during your final working year, the amount you can withdraw monthly at age 68 (increasing 3% annually) is $7,164.

That’s an additional $592 a month. Of course, this also depends on your investment returns, tax planning strategy and other factors, but it gives you a general idea.

While it may make financial sense to wait another year before retiring, it’s not the only consideration. If you’re not in the best of health, for example, you may want to start enjoying your golden years now rather than keep working — especially if work is a huge source of stress that exacerbates your health issues.

After all, no one is guaranteed to live another 20 or 30 years after retirement. It’s also easy to fall victim to the ‘just one more year’ syndrome.

But, most Americans don’t wait until their FRA to retire or to claim their Social Security benefit. The median retirement age in the U.S. is 62, according to MassMutual’s 2024 Retirement Happiness Study, with nearly half (48%) of respondents saying they retired earlier than planned.

So, if you’re thinking about retiring early, you may want to crunch the numbers first — since working another year (or three) may provide much more financial security in your golden years.

If, however, you’ve already reached your retirement goals, then it may not make sense to wait another year. In the aforementioned example, retiring at 67 means you’d have $2,800 from Social Security and $6,572 from your retirement savings, for a total of $9,372 a month (before tax).

Still, that’s well above your retirement spending budget of $6,500 a month. Sure, you’d have even more if you worked another year, but only you can decide if it’s worth it. It may be a good idea to consult a financial adviser to crunch the numbers and discuss your options.

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Vawn Himmelsbach Freelance Contributor

Vawn Himmelsbach is a journalist who has been covering tech, business and travel for more than two decades. Her work has been published in a variety of publications, including The Globe and Mail, Toronto Star, National Post, CBC News, ITbusiness, CAA Magazine, Zoomer, BOLD Magazine and Travelweek, among others.

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