How to earn an 8% raise each year in your 60s

Investing legend Charley Ellis offers clear advice for near-retirees about how long to work and when to collect Social Security.

By Charles D. Ellis, Guest Contributor

Feb 3, 2015 @ 3:09 pm EST

How would you like to get an 8% raise every year - as regular as clockwork - guaranteed by the United States Government and protected against inflation?

You can get those raises. We all can. Here's how.

While anyone can - if they insist - start to claim Social Security benefits at age 62, unless for some special reason, you feel you really must, do not do this. Wait until you are 70 and you'll get 8 - count'em - 8 annual increases in payouts and each increase will be 8%.

8% x 8 annual increases equals 64% plus the benefit of compounding which will increase your monthly payout by…76%! And these much higher payouts will be adjusted to offset inflation and they continue to come your way as long as you live!

You are free to choose for yourself what's best for you - and so is every other individual. To get started on gathering important facts, take a look at the following table, and here's what you'll see:

1. On the left are monthly payouts at various ages of initial claiming: $1,339 per month if claiming begins at 62 and then on up to $2,395 a month if claiming is deferred to age 70.

2. Cumulative payouts received by age 73, 78, 83 and 93, etc. are shown as you read across from left to right.

Total Benefits Reserved by Various Ages
Starting Age (Social Security Benefit Paid) 73 78 83 88 93
62 ($1,339/month) $176,700 $257,100 $337,400 $417,800 $498,100
64 ($1,544/month) $166,800 $259,400 $352,000 $444,700 $537,300
66 ($1,793/month) $150,600 $258,200 $365,800 $473,400 $580,900
68 ($1,960/month) $117,600 $235,200 $352,800 $470,400 $588,000
70 ($2,395/month) $86,200 $229,900 $373,600 $517,300 $661,000

If you “plan” to die as early as 73, your best move would be to claim at 62 - as you can see in the table. But, if you expect to live to 83, or longer - as most of us will - you'll do better by waiting to claim until you are 70, knowing your total Social Security benefit will get better and better the longer you live. Given the recent significant increase in life expectancy, we should all be alert to the prospects of living longer. And every extra year we live makes the case for waiting to claim Social Security benefits later even better!

That's not all! For those corporate workers with a 401(k) retirement plan choosing to continue working until 70 will likely more than double 401(k) benefits. Let's do the math.

To make it easy, let's contrast 401(k) payouts for those who retire at 62 with payouts for those who retire at 70. (Of course, market returns are uncertain, so the numbers are necessarily based on sensible probabilities.) The worker who decides to continue working to 70 puts in 8 more years. This means…

• 8 more years of contributions going into the 401(k).

• 8 years of not drawing money out of the 401(k)'s accumulated savings.

• 8 more years of investment returns on the assets in the 401(k).

For the average American worker, here is what can be expected. For the typical working household who, we know from the data, currently has only $110,000 in combined 401(k)/IRA assets and annual earnings of about $75,000 (Average earnings for all American households is about $50,000, but for those approaching retirement, earnings average $75,0000.) Since living expenses tend to drop in our sixties and early seventies, our sixties are very good years for extra savings - before the increasing costs of healthcare in our late seventies and eighties.

• At a 12% rate of savings, annual contributions into the fund of

$9,000 x 8 years = $72,000.

• Not taking 4% annual withdrawals from the 401(k):

$4,400 x 8 years = $35,200.

• Investment returns added - assuming a 60:40 portfolio of stocks and bonds earns at a rate of 6% per year = $71,040.

The total of these add-ons would increase the savings of this representative worker by $148,200 - more than doubling his 401(k) fund and, of course, more than doubling his annual payouts in retirement.

Add the 76% increase in Social Security payouts and the more than 100% increase in 401(k) payouts and the increase in annual payouts during retirement would make a major positive difference - the difference between “too little” and “enough” - for millions of American workers during their years in retirement.

In theory, we all want to balance our working years with our years in retirement. In practice, that means working at least long enough to save enough to cover all our costs in retirement.

Ever since Social Security was created in 1935, longevity of Americans has been increasing. But, our years in retirement have increased by 100% of that total increase in longevity. And the actuaries have just added another increase which, unless we rebalance, will go entirely into increased years of spending in retirement. (And most of the increase will be added to our years in “old age” which can be so expensive.)

We need to rebalance by working longer. And when we get the facts on how much we each benefit from working longer…ideally to age 70…most of us will want to have that opportunity.

Charles D. Ellis Ph.D. is the founder of investment consultancy Greenwich Associates and the author of more than a dozen books, most recently Falling Short with Alicia H. Munnell and

Andrew D. Eschtruth, a book about the retirement crisis and what should be done about it.

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