By Leon LaBrecque

A common question in retirement planning is when to retire. Many pre-retirees follow a mantra of retiring at age 62, the earliest age at which you can collect Social Security retirement benefits. The following dialogue and examples are intended to make a comparison to retiring later than age 62 and the prospective value and cost of retiring later.

So, this is a real case study of a client, who is a manufacturer's representative. His current salary is about $80,000 a year, and he is 62 years old. Based on his current annual salary, his after-tax/after-saving annual income is about $53,354. To him, 62 is a magic age at which he can get his Social Security, so he's bent on retiring and picking out his next boat. He has about $500,000 of total savings in his 401(k) and IRA. He's single (but considering marriage). His version of what will happen is that he will retire now, collect Social Security of about $1,825 a month, and take a withdrawal of about 4% annually, or $1,667, from his deferred asset accounts. This comes to about $3,491 a month (before taxes). I suggested that he was perhaps missing some fine points about retiring at age 62:

• Waiting will add more contributions to his 401(k) plan
• Waiting will not withdraw from his 401(k), so he will have more growth
• Waiting will increase his Social Security benefit by about 8% a year
• Until he hits age 65, he will have to pay his own healthcare.

These points perked up his attention, even though he looked unhappy. He asked if that made a big difference if he waited two years and I suggested it would. So we ran the numbers:

We assumed 2% COLA on FICA, and a 6% rate of return. * Retire at 62 but defer Social Security to 64

So by waiting two years he will likely boost his Social Security (for life) by about 11%, increase the balance in his investments by the return on investment and the additional contribution, and not have a withdrawal on his investments. In other words, he gains what he made, what he put in, and what he didn't take out.

We can carry this out a year further, since he will pay less for medical insurance at age 65, when he is eligible for Medicare. Let's presume he takes out a Medigap policy for $300 a month and pays his normal Medicare B premiums at age 65:

* Retire at 62 or 64 and defer social security until 65

At age 65 we are achieving some useful replacement ratios, but with some dramatic differences. Waiting makes a difference, but how far can you go? In his case, he gained about 5% replacement of income (at age 65) for each year of waiting. If he wanted to replace 100% of his after-tax/after-saving income, he'd wait until age 67.

The money aspect is one thing, but what is he giving up? If we presume that working neither extends nor reduces your life expectancy, he might live to 85 (we're using the Social Security actuarial table). That's 23 years from his current age.

Of those 23 years, we can predict that a portion will be "good" years, where he can have fun, be healthy, travel and enjoy life. He'll have a portion where he slows down, which we can call the "bad" years. He will be truly retired at this point. The last phase is "ugly," where life is a series of doctors and prescriptions and caregivers.

If you play it right, the first phase lasts 22.5 years and the second phase lasts the remaining half a year and you pass peacefully in your sleep after having a great afternoon and dinner with your favorite people. But the point is simple: Delaying retirement cuts into the "good" years. We have to be aware of that tradeoff. He could hold off to 70 and have more income than he did working, but at what cost? Only 8 good years.

We finished the conversation. He was still glum, but understood my point. "I want to golf more," he said. "My friends are retiring and golfing and having fun. I want to have more fun." I nodded my head in agreement, "Golfing more is a good goal, but not mutually exclusive from retiring. What if you break out the two ideas: Retire in two years, and golf more now? Let people know you want to golf more. Get up early on the weekend and hit balls. Then in two years you can retire and golf. And you'll be better able to afford it." He was thinking. "For now, I think I'll wait," he said. "Hold on," I said. I went to my stash of swag from various fund managers and plucked out a sleeve of good golf balls. "Here's a start."

About the author: Leon LaBrecque is the CEO and managing partner of LJPR Financial Advisors in Troy, Mich. He is passionate about increasing financial literacy and dedicated to staying abreast of the developments in the financial sphere. His passion for helping people understand and manage their money drives him to pursue unique solutions for financial content and fuels his resolve to serve the larger community by working with the Michigan Association of CPAs as the head of their Special Task Force on the New Tax Law.