Workers trying to better prepare for retirement might want to reconsider how long they work before they finally cash in their chips rather than just boosting their savings rate.
They’ll have more of them to cash in if they do the former rather than the latter.
Those are among the findings of a new paper from the National Bureau of Economic Research. The Power of Working Longer, even if just for an additional three to six months, will net workers more benefit (and money) “in terms of increasing a household’s affordable, sustainable standard of living in retirement” than socking away one more percentage point in savings over a 30-year period.
As incredible as that may sound, the difference in effectivity gets even more pronounced the later in life the decision is made.
The researchers wrote, “[i]ncreasing 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.”
In light of current circumstances, including “persistently” low real interest rates and wage growth, the paper suggests that households reassess and consider changes to their retirement strategy periodically to achieve optimum results.
It also points out that “[s]aving an additional one percent of earnings … would affect the retirement standard of living much more at age 36 than at age 56,” and that the impact of choosing cost-efficient assets—something recommended by financial planners to increase retirement resources — “diminishes with age since there are fewer years to enjoy the benefit of a lower cost portfolio.”
But when it comes to a planned retirement date and Social Security claiming date, that’s not true; changes to those “continue to have the same impact on retirement living standards as a person ages.”
Researchers calculated the relative differences between working longer and saving more for a range of scenarios, including differing rates of return on savings, households with different income levels and for singles as well as married couples. The results still confirmed the researchers’ findings.