The current turmoil in financial markets is prompting many people to postpone their retirement plans. As dispiriting as that might sound, it could be one of the smartest decisions you'll ever make.

Bear markets can be particularly tough on people about to retire. Suddenly, the nest egg you've spent years building has lost a good part of its value. Just ask Joann Smith. The 54-year-old administrative assistant at an insurance company had about 40% of her investments in Merrill Lynch stock.

"I was told Merrill was a $100 stock," says Ms. Smith, who lives in suburban New York. But two weeks ago, Bank of America agreed to acquire Merrill in an all-stock deal initially worth $29 a share.

Ms. Smith, who says she was on track to retire early, now figures she will have to find a way to rebuild her savings. "I've taken a hit," she says.

For the growing number of Americans in this situation, a first response may be to ratchet up savings. But new research suggests that belt tightening isn't the best way to patch cracks in your nest egg. Instead, would-be retirees fare better by postponing their last day on the job -- even for just a year or two.

Gain by Working Longer

"Increasing retirement contributions at the last minute isn't going to help that much," says Christine Fahlund, a senior financial planner at T. Rowe Price Group, a Baltimore-based mutual-fund company. "What really gives savings a lift is continuing to work."

According to T. Rowe Price, a 62-year-old with a $100,000 salary and a $500,000 nest egg will see his annual retirement income from investments and Social Security rise by 6% for every additional year he remains in the work force. This assumes no dollars from those additional paychecks go into retirement savings.

Now, let's say this person keeps working and adds to his savings -- by putting aside as much as 15% to 25% of his annual pay. In this case, the eventual bump in annual retirement income is about 7% or 8% -- only one or two percentage points more than the increase from working alone.

Why does working longer yield a better outcome than saving more? For one thing, money saved on the eve of retirement won't have much time to compound. In contrast, by postponing retirement, a person will delay tapping retirement savings and Social Security.

Social Security alone increases its payouts by some 8%, plus an additional 2% or so for inflation, for every year a beneficiary between ages 62 and 70 refrains from collecting a check.

Moreover, "the number of years you'll have to support yourself on your retirement savings will shrink," Ms. Fahlund says.

The same logic applies to retirees able to return to work -- even if only on a part-time basis. "By returning to work, you won't have to tap into your portfolio, so all the savings you've already accumulated can continue to grow," says Ms. Fahlund.

That helps explain Ken Mengel's decision. The 60-year-old retiree in Harrisburg, Pa., took a buyout from Verizon Communications in 2003. But now -- with the balance in his retirement account about $160,000 below where it was a year ago -- he's considering trying to parlay his interest in global-positioning systems into training work at companies.

'Play Money' Is Missing

"I've gotten a little more concerned than I was, because I don't have the income stream to do some of the things I like to do," Mr. Mengel says. "The play money's not there."

Of course, working in later life -- whether it's postponing retirement or rejoining the work force after retiring -- isn't what many older adults had in mind. "I decided this past year I really wanted to continue volunteering with the nonprofit world rather than working," says Barbara Hawkins, 75. The retired grant writer from Cleveland says her retirement portfolio has "taken a terrible beating" of late, losing some $300,000 in value in the past few years.

"This is all I have for the rest of my life," Ms. Hawkins says. "I'd like to build my savings back up...[and] I'm sure I can get a job," she adds. "But I just don't want to [work] anymore."

To make postponing retirement more palatable, Ms. Fahlund recommends spending some of the money you would normally channel into your retirement savings on things you've been looking forward to doing in retirement.

That way, "work won't seem so arduous," she says.