In today’s low interest rate environment, a common question is how can I increase my portfolio returns? If you’re close to retiring, one strategy that can have a significant impact is to actually delay retiring at least one more year.

According to an article in the Journal of Financial Planning by David Blanchett titled “The ABCDs of Retirement Success,” the impact of waiting can be the equivalent of adding one percent per year of additional returns during retirement. During a time when five percent is a reasonable rate of return for retirees, this strategy represents a 20 percent increase!

The specific items addressed in Blanchett’s article in regards to delaying retirement include the benefit of delayed withdrawals from your investment portfolio and higher Social Security benefits. Not only does waiting one year prevent you from drawing from your investments, it also allows more time to make additional contributions. Interestingly, Blanchett reports that generating above average returns, typically described as “alpha,” does not have nearly as gretirereat of impact on retirement success as the amount you withdraw each year from your portfolio or the total amount you have invested in stocks.

 Most people are aware that the longer you wait to collect Social Security, the higher the benefit you collect. What I think most people under appreciate is the impact delaying has on increasing the chances you won’t outlive your money. Blanchett’s paper tries to quantify these decisions over different life expectancies.
 No surprise, the longer you live the more important waiting to Social Security becomes. While dying early would be unfortunate, the financial impact is not nearly as significant as the risk of living a longer than average lifetime. Not only does waiting increase your starting monthly Social Security benefit, it also means future cost of living adjustments will be larger too. For example, a three percent increase on $1,000 is greater than on $750.

Waiting to retire can help transform a plan likely to fail to one that will most likely succeed. To learn more about how to make Social Security work for you, I highly recommend Jim Blankenship’s book “A Social Security Owner’s Manual.”

 Blankenship outlines a number of unique rules to Social Security that will help you translate Blanchett’s research into actionable ideas for your situation. Not only can you determine the impact of waiting (as it’s different depending on your year of birth), you can also learn about the rules of working while collecting benefits and how benefits are subject to income taxes.

 

As published in the Racine Journal Times | October 6, 29016

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