Nearing Retirement – is It Better to Save More or Work Longer?

When examining whether you are ready to retire, the question on your mind should inevitably be, “can I sustain my expected standard of living through my retirement years?”  For many, there is a “magic” age by which we wish to retire – whether it is 65 when Medicare kicks in or full retirement age for Social Security benefits.  Anyone who has ever been through the financial planning process knows that the target age rarely changes.  It is all about what needs to happen to be able to retire at the right age with the right amount of money.  Inevitably, the advice tends towards saving more to get you where you want to be financially, regardless of age.  But is this the right advice?  The results of a study done by the National Bureau of Economic Research suggests otherwise.[1]

The study examined how households that are close to retirement could achieve “sustainable retirement consumption” by either saving more or retiring later.  The study assumed that workers claim Social Security upon retirement and those who continue to work continue to contribute to their employer’s retirement plan.  It also assumes that the entire balance of an accumulated retirement plan is annuitized.  The results showed that working one year longer is much more powerful than saving one percentage point more for 30 years, but only if working longer is accompanied by deferring the start of Social Security and the annuitization of the accumulated retirement plan balance. 

In the study, sustainable income in retirement was composed primarily of Social Security at 81% and the annuitized retirement plan balance at 19%.  By working longer and deferring the start of Social Security, the earner could increase both the Social Security income and the annuitized income, while by saving more, the earner could only increase the annuitized retirement plan balance, which makes up only 19% of retirement income.  Working only 3 to 6 extra months has an equivalent impact on the sustainable standard of living as saving one percentage point more for 30 years.  Increases in saving that start later life have an even smaller impact.

Regardless of what stage you are in your working life, it is important to get a financial check up to make sure you on track to meet your goals.  While the results of the study are quite interesting, every situation is unique.

[1] https://www.nber.org/system/files/working_papers/w24226/w24226.pdf

ASK ANYA

Hook Law Center: Anya, your mom and dad have told me that you have been meowing all night for the past few nights.  What gives?

Anya: Well, that is a very good question.  First, I think mom should take me to the vet to make sure nothing is medically wrong with me. There could very well be a good explanation that has nothing to do with my physical health.  Cats are naturally more active at night, especially younger cats like me whose instincts tell them this is a great time to hunt.  Also, I may be bored, or I haven’t tired myself out during the day.  In fact, one of my humans was home from college for five weeks and was with me all day every day.  Now she has gone back to school and my other humans are at work.  Finding a way to keep me more active during the day and feeding me later in the evening may help.  Experts also say my humans should ignore the night-time serenade – I don’t think I agree!