We used to think that a delayed retirement was the best way to offset a small IRA or 401(k) balance. But here is a better solution

When I read that the average retirement savings balance among Americans ages 65 to 74 was just $200,000 in 2022 (the latest year for which this data is available from the Federal Reserve), I was disappointed, but not particularly shocked. It’s no secret that many people struggle with retirement savings.

The problem, however, is that approaching retirement with just a $200,000 IRA or 401(k) — or less — could put you in a very precarious financial position once your career ends. Withdrawing from an IRA or 401(k) plan of this size at 4% per year, which financial experts have long recommended, gives you only $8,000 in annual income.

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When you add in the roughly $23,000 a year the average retired worker receives today from Social Security, that’s an annual salary of $31,000. For many people, this will not be enough, especially given the lingering impact of inflation.

If you’re approaching retirement with a small retirement plan balance, you may be inclined to continue working full-time for a few more years. And if you had asked me a few years ago if that made sense, I would have said yes.

But I’m no longer convinced that delaying retirement is the best way to make up for the savings gap. Instead, I think there is another approach worth exploring.

The problem with late retirement

There are some problems with using delayed retirement as a means of catching up on the savings front. First, it assumes that you will be able to continue working full-time.

Once you reach a certain age, it can be difficult to land a full-time position. If you no longer have a job at age 67 or your company goes out of business, you may not be able to hire for a comparable position at another company. Even though it is illegal to pass on a candidate because of age, it is also very difficult to prove that such a thing happened.

Plus, you never know if health issues might make it impossible to continue a full-time job. And even if the full-time job remains available to you later in life, continuing full-time hours could wreak havoc on your health (physical and mental).

A better solution

Delaying retirement and working a few extra years can help you grow your IRA or 401(k) balance. But before you go down that path, I recommend a different approach: retire from full-time work in good time, but join the gig economy at the same time.

The nice thing about the gig economy is that you can set your own hours and limit your stress levels by choosing work that isn’t too demanding. If, at a certain age, it’s a struggle to get up at 7:00 every morning to go to work, you might find a gig opportunity that makes you start your work day at 10:00 or 11 :00. And if you can no longer sit at a desk and type all day because of back or wrist pain, you might find a job that gets you up, moving, and engaging in tasks that they are better for your physical health. .

Plus, moving into a gig role still gives you a taste of retirement, just without the complete loss of income. You may still need to tap into your savings to supplement your Social Security benefits, but these withdrawals may be minimal. And if your work turns out to be more profitable than expected, you may be able to leave your retirement plan alone or even add to it.

In theory, delaying retirement to offset a small IRA or 401(k) is a good idea. In practice, it might not work. Or, it might work but have health consequences. So before you decide this is the best way to give your savings a much-needed boost, see if you can move forward with your retirement plans and embrace the gig economy at the same time.