06/22/2010 10:59 am ET | Updated May 25, 2011

Hard Times Excerpt: How Working Longer Helps

This is the second of four excerpts from my new book, The Hard Times Guide to Retirement Security (Bloomberg Press/John Wiley and Sons, June, 2010).

Work in retirement? It might sound like a contradiction in terms, but we're looking for ways to achieve financial security over a retirement that could last 20 years or more. One of the best ways to do that is to work just a little longer than you might have planned. Working for even a few additional years can pay a surprisingly large bonus.

Most people say they don't plan to retire until age 65 at the earliest, but this is one of those cases where words and actions don't match. More than half of Americans file for Social Security at age 62 -- the youngest age of eligibility. Even more striking, just 10 percent of men and women waited until age 66 to file for their benefits.

Working until their Normal Retirement Age (NRA) could have boosted income in retirement by a third, experts say. The reasons are simple:

-- Working until your NRA means you won't incur the early-filing benefit reductions imposed by Social Security.

-- During your additional working years, you can continue to contribute to your 401(k) plan, building additional balances that can be put to work in the market.

--Every additional year of income is a year in which you don't support yourself by drawing down retirement balances.

"The usual pattern has been to work forty years and retire for twenty," says Alicia Munnell, director of the Center for Retirement Research at Boston College. "If you push back your retirement age by four years, now it's work forty-four years and retire for sixteen, so the ratio is three-to-one. That just gives you a much better chance to have a really secure retirement."

How big a boost can you get from working longer? Financial planners at T. Rowe Price have used Monte Carlo simulations to project some answers. These are simulations that can be used to model future uncertainty, and the analysis produces outcomes based on hypothetical probability. But the illustrations make the point-convincingly-that you can improve your chances for long-term retirement security by remaining in the workforce longer.

First, let's consider the impact of working and saving longer on your retirement income. Consider the example of a woman who is working full-time with an annual, fixed salary of $75,000 and tax-deferred savings of $150,000. Let's say that instead of retiring at 62, she decides to stay on the job for three additional years until age 65 and that annual inflation runs at a 3 percent rate. Let's also assume she saves 15 percent of her salary, or $11,250, for each of those additional working years.

Down the road, those decisions will boost her annual retirement income from investments by about 14 percent per year. At the end of those additional working years, her annual retirement income, in today's dollars, would be 43 percent higher than it would have been had she retired at age 62. If she could sock away even more of her income -- 25 percent -- the total increase in her income from her investments alone would be 60 percent.

Factoring in the benefit of delayed Social Security benefits really adds rocket fuel to the projections. The Social Security Administration's formulas give our hypothetical worker a significant increase in income; every year she waits to file for benefits will yield about 8 percent more in payments (in today's dollars). That really starts to add up in the out years.

Next, let's combine the impact of our worker's decision to work longer and delay Social Security. This gives us the most complete picture of how working longer can help. By working until age 67 and saving 15 percent of her salary, her gain in annual retirement income from both Social Security and her investments combined will be 58 percent, or $1,000 more per month in today's dollars.

If working longer makes such economic sense, then why don't more people do it? Certainly, the economic crash is forcing premature retirement for many older workers. But even when the economy was in better shape, more than half of Americans filed for Social Security at age 62, so the recession alone doesn't explain the trend.

Health problems that force retirement are another possible factor, and the boomer generation certainly is confronting problems that could prevent many from working: Rates of obesity, diabetes, and heart disease are rising, for example. However, the research by Munnell of Boston College shows that, on the whole, older workers are no less healthy than they were 40 years ago.

Munnell thinks that early retirement incentives offered by many employers, along with the availability of Social Security benefits, often outweigh workers' perception of the long-term gains available from working longer.

She also thinks Americans take the cue to retire at 62 from signals sent by employers, co-workers, and even friends and family. "It's a cultural expectation," she says. "People just think they should retire, and it becomes infectious. We see our neighbors or our spouses doing it, so we think we should, too." She also argues that the start of Social Security eligibility at age 62 creates an "easy out" for employees who don't find satisfaction in their work.

NEXT WEEK: How to get the most from your Social Security benefits.

Reprinted with permission of John Wiley & Sons, Inc.