Bank Rates Got You Down? How to Give your Retirement Savings a Powerful Boost

Despite a dizzying rally over 2009 and part of 2010, stocks have yet to regain their mid-2007 highs prior to the financial crisis. Even when stock prices do break even with that high water mark, it will only mean they've gone years with no progress.

That's enough to put a retirement plan well behind what it would have been expected to earn. For more conservative investors who have the bulk of their money in money market accounts, savings accounts, and CDs, record-low bank rates haven't made it easy to keep on track with carefully calibrated investment return projections either.

If you've seen your retirement nest egg suffer a few cracks during the recent bear market, there is a powerful tool at your disposal which can help your retirement savings catch up to your retirement needs.

No, the answer to this problem is not some risky investment technique, but simply to plan on working longer. Certainly, that's not an easy answer or one we like to think about, but when you see how powerful an effect it can have, you may find the motivation to put in a few more years.

Retirement Age and Life Expectancy

The traditional retirement age of 65 came into vogue when life expectancies weren't as long as they are today. Now, according to IRS figures (apparently, they are experts on both death and taxes) the average 65-year-old can expect to live another 21 years.

That means you'd have to plan your retirement savings to last for 21 years--or longer if you want to reduce the risk of outliving your savings. Funding such a long retirement period can put quite a burden on your savings.

Extra Years Have a Powerful Impact on Savings

Suppose instead you decide to delay retirement until you are 70. According to those same IRS figures, you could then expect to live another 17 years. Effectively, you've just shaved four years off your retirement burden.

The extra years have a surprisingly powerful impact. Suppose you are putting aside $10,000 a year and plan to retire on $50,000 a year. You have some savings built up, but perhaps it looks like you'd come up a little short of having those savings last through retirement.

With some serious belt tightening, you could boost your personal savings rates to maybe $12,000 or $13,000 a year--not enough to make much difference if your retirement date is fast approaching. In contrast, look at what happens if you work an extra five years.

First of all, that gives you an extra five years of retirement contributions. At $10,000 a year, that would add up to $50,000. Second, because of the difference in life expectancies for age 65 and age 70, you'd have, on average, four fewer years of retirement to fund. At $50,000 a year of retirement income, delaying retirement would lower your target by $200,000.

Put the two together, and working an extra five years could close a retirement gap by $250,000. That's quite a bit of catching up in a relatively short period of time. Meanwhile, investment returns (fingers crossed) or interest rates on CDs or money market accounts could add to your existing savings. As another boost, delaying the start of your Social Security benefits can increase the size of your annual benefit.

Again, working an extra five years may not be an easy answer, but under the circumstances, it may be the most powerful solution to an underfunded retirement plan.