More than half (54 percent) of U.S. adults plan to work past the traditional retirement age of 65, according to a recent Transamerica survey. Although there are many potential reasons for delaying retirement, doing so can often provide a big boost to one’s standard of living in old age. For example, a working paper from the National Bureau of Economic Research (NBER) argued 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 three decades. There are of course many assumptions behind such a claim, but the paper’s authors stress that in general working longer can have a pronounced effect on old-age income because of the way Social Security payouts are calculated.
Specifically, benefits are adjusted on a monthly basis, increasing each month the claim is delayed. The study’s authors estimate that this can enable 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 government retirement benefit by as much as a third. That is a big deal since the researchers estimate that Social Security accounts for about 80 percent of most workers’ retirement income. However, the Transamerica survey mentioned above found that only 42 percent of Baby Boomers, 28 percent of Gen-Xers, and 19 percent of Millennials expect Social Security to be their primary source of old-age income, suggesting that many people are perhaps drastically overestimating their current level of retirement preparedness.
More importantly, the findings of the NBER paper should not be used to discourage Americans from setting more money aside, but rather to inform individuals relatively close to the age of retirement with a savings shortfall that working a little bit longer is something worth seriously considering. Of course, the long-term sustainability of the Social Security program is uncertain, and working longer will not always be a readily available option for everyone, meaning that all Americans should hedge against such risks by striving to save as much money for retirement as possible. Utilizing tax-advantaged vehicles like 401(k)s, IRAs, and HSAs can provide additional help, and the sooner one can start the better because compound interest and other investment returns over long time horizons are among the most powerful ways to ensure a comfortable and financially secure retirement.
Sources: TCRS, WSJ, NBER
Post author: Charles Couch