Will working longer affect your retirement? Of course.

But how much longer and how big of an impact will it make? That question will lead you down a much more useful thought path.

There are many things that will affect how long you are in the workforce. Some of these things you can’t control (such as health), while others you can. When it comes to what you can control you would be smart to think about the impact of your decision on your retirement.

Sometimes waiting for even one more year to retire can dramatically improve your retirement.

This isn’t just to say that you should always choose to work longer.
By all means, if you can comfortably retire now, why wait?

Whether you choose to work for 20 years, 40 years, or anything in between, that choice should be influenced by reasonable analysis.

In this article I’ll show you a few things that will help you think about how your own career length will affect your retirement.

Social Security Benefits

If you’ve read many of my articles you know that Social Security is a very important element of most Americans’ retirement plans. You will want to carefully plan your Social Security benefits to get the best benefit possible.

A significant factor in planning your Social Security benefit is the length of time you are employed.

You know it takes 40 quarter-credits to qualify. This means you need to be employed, and pay Social Security taxes, for 10 years to qualify.

Qualifying for a benefit and the value of that benefit are very different issues, however.

Once you qualify, your benefit is based on the average of your highest 35 years of earnings.

Lets break that down a little more. Your HIGHEST 35 years of earnings. Let’s say you started work at 22 and plan to retire at 65. Your highest 35 years of covered earnings are likely your last 35, or at least close to the end of your career. That would include earnings from the time you were 30 until you retired.

What if you decided to retire at 60? 35 years takes you back to when you were 25.

Your income in those first few years of your career were likely MUCH lower than your income now or in the last few years of your retirement. This will drive your average lower.

Less Than 35 Years of Covered Earnings?

But what if you don’t have 35 years of covered earnings? That may sound absurd to some of you but there are certain demographics where that may be the norm.

Take, for instance, my own profession of higher education. Since most academic jobs require a PhD, many faculty members do not even enter the full-time workforce until they are near 30. Some even later.

What about early retirees? If you started working when you were 20 and retire in your early 50’s, you may not have 35 years of covered earnings.

In either case, your Social Security benefit is still calculated as an average of your highest 35 years of earnings. You’ll have zeroes in some of those years.

Zeroes, of course, will drive your average even lower.

If you work additional years to “cover” those zero years, you’ll be replacing those zeros with earnings that are likely near your highest. That will pull your average up sharply.

Your Investment Portfolio

The length of time that you work will also affect your retirement portfolio. You can think of the impact on your portfolio as a combination of two broad effects. The first deals with the growth of our portfolio. The second is the drawing down effect from starting distributions earlier.

Retirement Savings

Consider also that you have a retirement plan like a 401k or 403b. While you are working, you’ll be contributing to that plan. Your account growth will be a function of:

1. Your contributions
2. Your employers matching contributions
3. Investment growth

The more years you contribute, the more years each of those things accumulate. Because of the power of compounding, even a few years can make a substantial difference.

Retirement Withdrawals

Now consider that when you retire you’ll likely start to take withdrawals from the portfolio. The sooner you retire, the more withdrawals you will take over the course of your retirement. This means your portfolio needs to sustain you for a longer period.

You’ll need to adjust the value of your withdrawals accordingly. If you don’t, your portfolio may not last as long as you had planned. The downside here is that now you are taking a smaller withdrawal.

The combined effects of less years saving and more years spending is much like burning the candle at both ends.

Putting It All Together

Let’s look at this all together now. The reality is that when you have a shorter career the effects mentioned above are multiplicative.

1. If you work for less than 35 years your Social Security benefit will be less than if you had a full 35 years of covered earnings.
2. Since you aren’t working any more you’ll also not be saving any more for retirement. You’ll miss out on a few years of contributions, matches, and compound earnings.
3. In order to maintain the same level of retirement spending you’ll need to withdraw MORE from your retirement account to make up for the smaller Social Security benefit.
4. If you start withdrawing earlier, and a higher amount on top of that, you’ll be placing greater strain on your portfolio. You’ll be more likely to draw down the value of your portfolio too quickly. Especially if you experience a bad sequence of returns.

Should you conclude from reading this article that you can’t retire before working 35 years? Absolutely not.

Before you reach any conclusion you’ll want to take the analysis presented and apply it to your own situation. Go pull your Social Security earnings record and see what your Social Security benefit will be. Then take a look at your portfolio and figure out a good withdrawal plan that you are comfortable with. I’ve written about several before such as the 4% rule or a strategy of taking variable withdrawals.

Will the income from your Social Security benefit and the withdrawal plan you choose be enough to support you in retirement? Can you reasonably expect that income to last for as long as you need it to?

If so, great.

If not, consider how delaying retirement for a few more years could improve your situation.