By age 65, many Americans could need anywhere from 6.4 to 14.9 times their current household income in retirement savings, according to updated J.P. Morgan estimates. The required multiple depends in part on what kind of lifestyle one wants to maintain in old age, but since preferences can change and unexpected financial obstacles are common, a safer guideline may be to simply always try to save as much money as possible. The earlier one can start the better, but those who waited until later in life to start setting money aside should not be overly discouraged because working longer can also be quite effective. A delayed retirement, for instance, means more time for one’s investments to grow in tax-advantaged plans through diversified market exposure, as well as additional years of matching contributions from employers, if available.
Continuing to work can also mean a significantly larger Social Security payout, and encouragingly we learned last week that a growing number of Americans plan to delay retirement for this very purpose. However, for those pre-retirees still unconvinced about the power of waiting to claim Social Security it may be worth reviewing a recent paper from the National Bureau of Economic Research. Indeed, the study found that continuing to work for just three to six months can provide the same boost in retirement income as saving an extra 1 percent of your salary a year for three decades. The bump from waiting is even more pronounced as one nears the age of retirement, with the researchers adding that “increasing retirement saving by one percentage point ten years before retirement has the same impact on the sustainable retirement standard of living as working a single month longer.” There are of course many assumptions behind such claims, 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 researchers estimate that this can enable average workers to raise their old-age standard of living by roughly 8 percent (for a couple and the subsequent survivor) simply by delaying retirement for a single year, and the effect compounds when the delay is extended. Moreover, a person can start claiming Social Security as early as age 62 but waiting just another four years could increase his or her level of retirement income by as much as a third. The study’s authors conclude that “The results are unequivocal. Primary earners of ages 62 to 69 can substantially increase their retirement standard of living by working longer. The longer work can be sustained, the higher the retirement standard of living … No reasonable amount of additional saving could impact the retirement standard of living so significantly.” Such findings, though, 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.
Sources: J.P. Morgan, NBER