Should You Delay Retirement?

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Many of us dream of the day when we hear the last school bell ring and step out into the freedom that retirement brings. However, there are a number of reasons that delaying retirement a few extra years may work in your favor.

First and Foremost – Finances

Retiring early can present a one-two punch to your financial situation. First, you have fewer years to collect a paycheck and save for your retirement. Second, you have more years to support yourself without a paycheck.

According to the Centers for Disease Control and Prevention, the average 65-year-old can expect to live another 18.5 years. If you're in good health and are lucky enough to avoid accidents, you could expect to live even longer.

Retire early, and you could add another decade or two to your retirement. In fact, some people may spend more years in retirement than they spent working!

The cost of health care is another major factor that makes retirement expensive. Some districts offer retiree health care, but subject to eligibility provisions (such as years of service) and only until Medicare eligibility. Check with your district to determine what if any retiree medical care benefits apply to you.

Even if you are at least 65 and eligible for Medicare, you will likely want to purchase a supplemental Medigap plan or choose a Medicare Advantage plan to help cover health care expenses. According to a study by the Employee Benefit Research Institute, men retiring at age 65 will need up to $173,000 in savings to cover health insurance premiums and out-of-pocket expenses in retirement if they want an even chance of having enough money. Women, who generally live longer, will need more – up to $242,000 in savings.* And, this does not take into account the cost of health care for individuals who retire early, before they are eligible for Medicare.

The Financial Benefits of Delayed Retirement

Besides giving you more years to earn a salary before you have to start drawing on your pension and dipping into savings, delaying retirement can help:

Increase the amount of your CalSTRS or CalPERS monthly pension benefit. Your CalSTRS retirement benefit is based on a formula that takes into account your age factor, service credit and final compensation. The age factor is determined by your age on the last day of the month in which your retirement is effective and is set at 2% at age 60. If you retire before age 60, the age factor is decreased. If you retire after age 60, it is increased up to a maximum of 2.4% at age 63. Note that there are special conditions that can also increase your benefit:

  • If you have at least 25 years of service credit, your highest one-year compensation will be used as your final compensation, rather than a calculation of your highest compensation over a three-year period.
  • If you have at least 30 years of service credit, a career factor adds 0.2 percentage points to your age factor, up to a maximum age factor of 2.4.
  • You may be able to purchase additional service credit to increase your CalSTRS benefit.
  • Unused sick leave can help increase your CalSTRS benefit.
  • The longevity bonus can increase your CalSTRS benefit, but only if you have 30 years of credit by Dec. 31, 2010.

Calculate your estimated CalSTRS retirement benefit here.

CalPERS uses years of service, amount of final compensation and a benefit factor based on age to calculate school member retirement benefits. The benefit factor increases each year, starting at 1.1% at age 50 to a maximum of 2.5% at age 63 or older. Calculate your estimated CalPERS retirement benefit here.

Allow you more time to save in your 403(b) or 457 plan. Let's take a hypothetical example of someone who originally planned to retire at age 58, but decided to wait until age 63. She contributes $300 a month to her 403(b) plan, which earns an average annual return of 5%.** In five years, she could accumulate more than $20,000 extra in retirement savings.

Potentially increase your Social Security benefit, if you are eligible for Social Security. Many California educators are not eligible for Social Security, and those who are may be subject to reduced benefits due to the Windfall Elimination Provision or the Government Pension Offset. However, if you are eligible for Social Security benefits, waiting until your full retirement age (65 to 67, depending on your year of birth) or later (up to age 70) may increase your monthly benefit. Read more about educators and Social Security here.

Potential Emotional and Mental Health Benefits, As Well

If you still enjoy your career in education, you may not be emotionally ready for retirement – even if you think you are. Be sure to consider how you plan to spend your retirement days, how you'll stay busy and how you'll maintain social connections, all of which are important to your emotional health. Not only that, a recent (and still controversial) study suggests that individuals who are retired do more poorly on memory tests. In contrast, those who worked did much better.***

Whether to retire earlier or later is a personal choice, but be sure to do your homework to make sure you are prepared. You may also want to meet with a financial advisor to discuss your retirement income options before making a decision. Read "The CTA Guide to Working with a 403(b) or 457 Advisor."

* Source: Employee Benefit Research Institute, June 2009,
** Rate of return is for illustration only. It does not represent the return of any specific investment. Your returns will vary depending on the performance of the products you choose for your plan.

*** Source: The New York Times, Oct. 11, 2010.