How Long Should I Work Before Retirement?

Most Americans no longer aspire to retire early. Workers are increasingly pushing back their desired retirement age and wondering if they will be able to retire at all.

The age workers expect to retire has increased from an average of 60 in 1995 to 66 in 2011, according to a Gallup poll. The proportion of people aiming to retire early has plummeted from 50 percent in 1995 to 28 percent in 2011. Most Americans now expect to retire at age 65 or later.

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"It's just not possible for people to work for 30 or 40 years and support themselves on their assets for another 20 or 30 years," says Alicia Munnell, director of the Center for Retirement Research at Boston College. "Many people saw their 401(k)s decimated by the recession, and many people also saw their house lose value."

The recession has accelerated the trend of Americans pushing back their retirement date. Almost half (46 percent) of people age 50 and older say they now plan to retire at a later age than they did three years ago, and the reason is often because the value of their 401(k) and other retirement investments has declined, according to a recent Towers Watson survey. Unsurprisingly, workers depending on their 401(k)s to finance retirement are planning longer delays than people with a traditional pension.

More time to save. Saving enough to fund a 30-year retirement is extremely difficult. Postponing retirement allows you to reduce the number of years you'll need to finance and gives your assets more time to grow. "Many people at the end of their work life are making the best money they ever have," says David Weir, director of the University of Michigan's Health and Retirement Study. "In those last few years, once their kids are out of college and they have paid off their mortgage, for many people, this is when they really have the ability to save."

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There are many tax advantages to delaying retirement. Workers age 50 and older can contribute up to $22,500 to a 401(k), $5,500 more than younger workers can defer paying tax on. Older workers can also contribute $1,000 more to an IRA than people under 50. If you are still working, you can also delay required minimum distributions from your 401(k). Traditional 401(k) withdrawals are generally required after age 70½. But if you are still employed and don't own 5 percent or more of the company sponsoring the retirement plan, you can continue to delay withdrawals from your 401(k) and the resulting income tax bill. However, distributions from traditional IRAs are required even if you are still working.

Bigger Social Security checks. Social Security benefits are calculated based on your 35 highest-earning years in the workforce. If you continue to work and currently earn more than you did earlier in your career, you can boost the size of your Social Security payments.

Delaying the date you sign up for Social Security also results in bigger monthly checks. While you are eligible to claim your payments beginning at age 62, your payout will be reduced unless you wait until your full retirement age, which for most baby boomers is 66. Your payments will further increase for each year you delay claiming up until age 70. "For people who have average to above-average health, many of them would do better by delaying claiming Social Security to get a better benefit," says Weir. These higher payments continue for the rest of your life and are indexed for inflation.

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Health benefits. Purchasing an individual health insurance policy in your 50s or early 60s can be difficult and extremely expensive. Waiting until at least age 65 to retire eliminates a potentially huge retirement expense: retiree health insurance. Most workers (65 percent) base their retirement date on their eligibility for Medicare at age 65, Towers Watson found. Continuing to work for a company that provides benefits is one of the most cost-effective ways to find health insurance before age 65. There's also some evidence that delaying retirement has health benefits. "People have a social network at work, and they have friends and activities through the workplace that help keep their mind nimble," says Olivia Mitchell, director of the Pension Research Council at the University of Pennsylvania. "In countries with early retirement, there are much greater rates of mental and physical decline."