Retirement Standard of Living: Work Longer or Save More?

What is the best way to increase a household’s affordable, sustainable standard of living in retirement? A recently released paper discusses the relative strengths of saving more and working longer to bring that about.

The debate over the merits of working Longer vs. those of saving more is not new. But in “The Power of Working Longer,” researchers Gila Bronshtein of Cornerstone Research, Jason Scott of Financial Engines, John B. Shoven of the Stanford University Department of Economics and Sita N. Slalov of the George Mason University School of Policy and Government offer a fresh perspective.

The four researchers found that delaying retirement for short periods can have the same impact on standard of living during retirement as a very small increase in savings rates. And they found that delaying retirement can have that effect regardless of whether the savings rate is raised by a very small amount and the new rate is in place for 30 years or is put in place for just the last 10 years before retirement. Specifically:

  • delaying retirement by three to six months has the same effect as saving an additional one-percentage-point of earnings for 30 years; and
  • delaying retirement by just one month has the same effect as increasing retirement saving by one percentage point 10 years before retirement.

Not surprisingly, the researchers also found that the longer one waits to boost retirement saving, the less effect it has. For example, saving an additional 1% would affect the standard of living during retirement much more if it is begun at age 36 than if it is begun 20 years later.

Working longer may pay off better for those who are close to retirement than making a minimal increase in savings rates at that point in their careers, the researchers suggest. “The impact of working longer relative to saving more increases as individuals get closer to retirement,” they write. Thus, adjustments to savings need to be larger the later in a career they are made, the researchers argue.

The researchers argue that as time passes and the uncertainties that couples face when they are young are resolved, savers should reassess their strategies for financing retirement, and should do so periodically. “For example, households today may wish to re-optimize retirement strategy in light of persistently low real interest rates and wage growth,” they write. “In a standard life cycle model with uncertainty, households continually reassess and re-optimize as new information is revealed. In reality, households facing constraints on their time and attention could reexamine their plan at periodic intervals, such as every 10 years.”

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