Consider the example of a woman, 61, who is working full time with an annual, fixed salary of $75,000 and a tax-deferred savings account of $150,000 invested in 40 percent stocks, 40 percent bonds and 20 percent cash. Instead of retiring at 62, she decides to stay on the job until age 66, and she saves 15 percent of her salary, or $11,250 annually, for each of those additional working years.
How much more retirement income would she have? T. Rowe Price analyzed the likely impact of her decision using the Monte Carlo analysis, which factors in thousands of possible stock market outcomes based on actual historical data. The analysis suggests that the woman would receive 44 percent more income from her investments and Social Security than she would have by retiring at 62. (In dollar terms, her income would increase from $21,656 annually at 62 to $31,273 at 66.) She would also earn about $300,000 in salary and benefits over those four years.
"Working longer really tips the scales in your favor," says Christine Fahlund, vice president and senior financial planner at T. Rowe Price. "Each year you wait gives your investments more time to compound and increases your Social Security benefits significantly."