The WSJ reports today on a new paper from the National Bureau of Economic Research illustrating the trade-off between working longer and saving more. NBER finds that delaying retirement and social security by just three to six months has the same impact on retirement income as saving 1% of your salary for 30 years. Sounds powerful.
A couple of words of caution on the results though. Most of the benefit from working longer comes from higher social security payments. For each year you delay social security passed your full retirement age, your social security benefit can rise as much as 8%.
If social security is a minor part of your retirement income plan, saving may still be your best route. It is also not advisable to assume that you can afford to save less because you can just work longer. What if you get injured and can’t continue to work? What if you decide at 65 that you are done dealing with the stress of a full-time job? What if social security benefits change?
Lots of uncertainty. The better plan is to save more today and plan on working longer.
If, like many people, you think your retirement savings aren’t on track, which do you think can have the most impact: saving more of your income or working a bit longer?
Setting aside a significant portion of your income is obviously a sound approach for building a nest egg, especially if you start saving early on. But working a little longer—an extra couple of years or even a few extra months—can have as big a payoff as saving substantially more, according to a new study.
A working paper from the National Bureau of Economic Research seeks to illustrate the trade-off between working longer and saving more. It finds that delaying retirement and Social Security payouts by just three to six months has the same impact on retirement income as saving 1% of your salary a year for 30 years.
“If you are approaching retirement and worried that you haven’t saved enough, our paper suggests that there is still hope,” says Sita Nataraj Slavov, a professor at George Mason University’s Schar School of Policy and Government and one of the authors of the paper.
Read more here.
Jeremy Jones, CFA
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