Earlier this year we looked at a report from the Transamerica Center for Retirement Studies (TCRS), which found that more than half (53 percent) of surveyed U.S. adults plan to work past the traditional retirement age of 65. Although there are many reasons why a person may want to delay retirement, doing so can often provide a big boost to one’s old-age nest egg. For example, a working paper from the National Bureau of Economic Research (NBER) argues that continuing to work for just three to six months can provide the same bump in retirement income as saving an extra 1 percent of your salary a year for 30 years. According to the paper’s authors, working longer has such a pronounced effect on old-age income mainly because of the way Social Security payouts are calculated.
Specifically, benefits are “adjusted on a monthly basis, increasing each month the claim is delayed,” which enables average workers to boost their Social Security income by roughly 8 percent simply by delaying retirement for a single year. Moreover, a person can start claiming Social Security as early as age 62 but waiting just another four years could increase his or her standard of living in retirement by as much as a third. That is a big deal since the researchers estimate that Social Security makes up about 80 percent of most workers’ retirement income. However, the Transamerica survey mentioned above found that only 38 percent of Baby Boomers, 26 percent of Gen-Xers, and 17 percent of Millennials expect Social Security to be their primary source of old-age income, suggesting that some people may be overestimating their current level of retirement preparedness.
More importantly, the findings of the NBER paper should not be used to discourage Americans from saving more, but rather to inform individuals relatively close to the age of retirement with a savings shortfall that working a little bit longer can be a very powerful tool worth considering. Of course, the long-term sustainability of the Social Security program is uncertain, and working longer is not always an option, meaning that Americans should strive to set aside as much money for retirement as possible. Utilizing tax-advantaged savings vehicles like 401(k)s and IRAs can provide additional help, and the sooner one can start the better because compound interest and other investment returns over long time horizons can be the most powerful tool for ensuring a comfortable and financially secure retirement.
Sources: TCRS, NBER, Wall Street Journal
Post author: Charles Couch