Saving more and working longer: Two powerful ways to increase your retirement resources

The July 2018 issue of the AAII Journal — the monthly publication of the American Association of Individual Investors — includes an intersting article about how to “increase your retirement resources”. This plain English piece summarizes some of the findings from the authors' research paper “The Power of Working Longer“.

According to the article, there are three primary factors that determine “the adequacy of retirement resources”. Those are:

  • When a person begins participating in an employer-sponsored saving plan,
  • What percentage of their earnings they save in such a plan (i.e., their saving rate), and
  • At what age they retire and begin taking Social Security benefits.

Until Elon Musk invents a time submarine, it's impossible for a worker to go back to their youth and begin saving for retirement earlier. Because of this, the authors focused their research on the relative power of saving more and working longer.

Note: To simplify matters, the authors make some assumptions. For instance, instead of investing in the highly-variable stock market, they assume their hypothetical subjects invest in a vehicle with a fixed rate of return: an annuity. This is a little goofy, but helps them come up with more precise numbers than they'd otherwise be able to achieve. Just keep this in mind as we talk about the article's conclusions.

The Power of Working Longer

First, the authors look at what happens when a person decides to delay retirement by a year — or more. Generally speaking, each extra year worked brings roughly a 7.5% increase to standard of living during retirement. And that's assuming a real (inflation-adjusted) investment return of 0%!

When you consider that stocks produce a long-term annual real return of about 6.8%, working an extra year has an even greater impact on standard of living in retirement.

Here's a table from the article that shows the potential increases in standard of living that come from delaying retirement. (All of these numbers assume 0% real returns.)

The Power of Working Longer

As you an see, if a 62-year-old opted to work an additional three years instead of retire, they'd enjoy an increased standard of living of nearly 24%. Working longer is a powerful way to increase your “retirement resources”.

The authors' research found that while investment returns do have an effect on retirement standard of living, they're not nearly as large as the effect of working longer. Assuming 0% real returns on investments, delaying retirement age from 66 to 67 leads to a 7.75% increase in standard of living. With a 7% real return (similar to average stock market returns), that one-year delay in retirement brings an increased standard of living of 9.56%. It's a boost, yes, but not even a boost of two percentage points over assuming zero investment returns.

The bottom line? Each extra year you work past your target retirement age brings a boost of roughly 10% to your post-retirement standard of living. Not too shabby.

The Power of Saving

The real reason this article caught my eye was the authors' discussion of saving. They dismiss saving rate as being less powerful than working longer, but I'm not sure that I agree. (Remember, I believe that your saving rate is the most important number in personal finance.)

Why are the authors dismissive of saving rate? Their research shows that for each bump of one percentage point in saving rate over thirty years, a person can expect a 2.16% increase in standard of living at retirement — assuming a 0% real return. This same increase could be achieved by working an extra 3.3 months past target retirement age.

But what if instead of assuming a 0% real return on investment, we assume a 7% real return on investment (which is close to the long-term return of stocks)? Then each increase of one percentage point in saving rate over thirty years leads to a 4.79% increase of standard of living during retirement. In this case, it would take six months of extra work to match a one percentage point jump in saving rate.

I think the authors are far too quick saving rate in favor of working longer. They're working with tiny, tiny fractions. Instead of talking about increasing savings by one percentage point, why not talk about something meaningful, such as an increase to saving rate of ten or twenty percentage points?

Assuming average stock-market returns (instead of 0% returns) — where every one percentage point increase to savings is equivalent to six months of extra work — then we find that by boosting your saving rate for ten percentage points over thirty years means you can retire five years earlier. If you boost your saving rate by twenty percentage points, you can retire ten years earlier. These are significant amounts of time!

To summarize, this article gives us two new financial rules of thumb. First, for each year you work past standard retirement age, you'll enjoy roughly a 10% increase to your post-retirement standard of living. Second, each percentage point bump to your saving rate is roughly equivalent of six months you don't have to work.

What if You Start Late?

To me, there shouldn't be an argument about whether it's better to work longer or to save more. Both strategies produce notable increases to standard of living in retirement. If we save more now, we'll have more later. And if we work a little longer, that'll provide a boost to our standard of living too.

Last of all, I'd like to point out that the authors correctly conclude that the later you start saving, the less powerful saving actually is. If you don't begin saving for retirement until age 56, there's far less time for the power of compounding to grow your wealth snowball. As a result, for older folks each percentage point increase to saving rate is equivalent to about a month-and-a-half of extra work (as opposed to between three and six months).

Effects of a Saving Rate Bump

This doesn't mean that you shouldn't start saving in your forties and fifties. It just means that the power of saving is diminished. And it means that, realistically speaking, you'll probably have to work beyond your desired retirement age.

[Increasing your retirement resources: The Power of working longer, AAII Journal]
More about...Retirement, Career

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Jason@WinningPersonalFinance
2 years ago

The benefit of starting early is exactly why I spent my 20’s and early 30’s earning and saving. Those savings are going to be super powerful and give me maximum flexibility in my 40’s and beyond.

Michael
Michael
2 years ago

Saving is definitely not enough! You need to make more money to be financially set in the future. I believe people should save as much as they can but focus most of their efforts in making more money, especially if you are in your 20’s or 30’s! Then invest your money so it can work for you. It’s really simple if you think about it but easier said than done. It takes some work and patience but it is possible to be financially free!

Raymond mills
Raymond mills
2 years ago
Reply to  Michael

Funny I never made a great salary but we managed to put two kids through college and achieve FI. Simply by brown bagging our lives…

Mick
Mick
2 years ago
Reply to  Michael

We have never made a big income and have been primarily a one income household. In fact all but the last 12 years we were well below average. Now we are average. However we put the kids through college with no loans, have 2 fully paid for homes ( 1 is a rental), 5 acres of hunting land, zero debt and about $460,000 in retirement investments. Oh and college plans for two grand kids. The picture much looks better with the pension. So while not a great amount of investments always investing some and being debt phobic has helped us… Read more »

Ross Williams
Ross Williams
2 years ago

I think it is helpful to remember that the reason for this “return” is that you have a shorter retirement and can spread your resources out over fewer years. It ignores the quality of those years and how that extra money will be spent. It might just mean you can afford a nicer wheel chair and fancier nursing home. It also ignores how important it is to share your retirement with your partner. At age 62 chances are better than 50-50 that one of you will die by age 77 (assuming a heterosexual couple). That means delaying retirement to age… Read more »

Jen
Jen
2 years ago
Reply to  Ross Williams

Really good points.

zzzzzz
zzzzzz
2 years ago

A 1% bump in savings rate is pretty small. For example, if you’re saving $100/month, a 1% bump would mean and extra $1/month.

zzzzzz
zzzzzz
2 years ago
Reply to  J.D. Roth

Increasing your savings rate from 5% to 6% isn’t increasing your savings rate by 1%, it’s increasing your savings rate by one percentage point.

It’s also a 20% increase in your savings rate.

Ross Williams
Ross Williams
2 years ago

“And it means that, realistically speaking, you’ll probably have to work beyond your desired retirement age.” Not really. It means you will have to save more. But chances are you will have more money to save as well. You will have a higher income and an empty nest. Frankly no one under 40 should be focusing on their retirement savings. If they have extra money, they should be saving it for more immediate improvements in their lives. A lot of made of the mathematical “miracle” of percentage increases, but there are huge opportunity costs to saving early. You give up… Read more »

Petra
Petra
2 years ago
Reply to  Ross Williams

Everyone should save for retirement from an early age. It should be a standard thing. You’re earning money? Well, congrats, set aside roughly 10% for retirement. Doing so will make a regular retirement entirely possible and will prevent you from being a burden on your children by the age that you can’t work anymore.

If you want to save more and retire early, you can do so by upping that percentage. But 10% from age 20 or 25 or so onwards will go a long way.

Steveark
Steveark
2 years ago

Great post J.D.! I started early, saved aggressively and worked longer(because it was fun). And sure enough I can now fund a retired lifestyle much grander than I even want to experience. I honestly think there is an optimum life with optimum expenditures and to spend more than that is going to hurt your happiness, not help it. Having too much money is not really a bonus but it isn’t really a problem either if you keep your lifestyle in the happy zone and not in the consumerist zone. I always feel smarter after I visit your site!

Accidental FIRE
Accidental FIRE
2 years ago

Like a lot of mainstream content, the authors don’t realize there are people who go way beyond what they think is possible, as exemplified by the saving rate discussion. As you pointed out – why don’t they consider savings bumps of 20% or 30%? If you asked them they’d probably just look at you like you’re crazy.

I’m crazy, and it worked ot well for me 🙂

Laura
Laura
2 years ago

Great find and article! I hope that the discussion and trend continues to focus on continuing to work as an option. Retiring at 65 and having 20 years without work may not be feasible or even desirable for everyone. I am hopping to have investments that will cover my retirement but also the option for flexible work to keep growing my finances as well as enriching my life.

Petra
Petra
2 years ago
Reply to  Laura

I’d try to be ready for a (lean) retirement by age 60. No matter how much you like your job now, by age 60 a lot of things might have happened. For example, your health may have, unfortunately, declined so much that you can’t work anymore. Or: the work that you’ve always done has changed so much, that you can’t do it anymore. Or: you lost your job and aren’t hired for a new job anymore because employers would rather hire younger folks. If you’re able to retire by age 60, then if something happens to your job and/or health… Read more »

Joe
Joe
2 years ago

This seems like funny math. How can working one extra year increase the retirement standard of living by 7.5%. That seems wrong to me.
For most people, if they work longer, they just spend more longer. I seriously doubt it will make that much of a difference.
This is mostly academic. I’m pretty sure real life isn’t like this. I’ll have to dig into the math more.

S.G.
S.G.
2 years ago
Reply to  Joe

They are likely also working the actuarial table (as noted in comments above). For example if you assume you’ll die at 75 and you retire at 65 you’ll have 10 years to live off your savings. If you retire at 66 instead you’ll have 9 years to live off your retirement and that year of expenses is covered by salary rather than savings. In this overly simple case your standard of living would increase by 11% by putting off your retirement by a year.

Jake
Jake
2 years ago

I’m sorry, but where is the real insight in this post?

Did you really just tell us to save more and work longer to have more money?

Bruce Brown
Bruce Brown
2 years ago
Reply to  J.D. Roth

J.D. – You did a great job in your OP of the subject and simplifying it for readers! This study has been picked apart and put back together again in depth at Bogleheads and on other forums as well. The only thing I would add is watching the 57 minute video of their presentation of the study and the follow up Q&A session was very informative for me. The link to the video is here at helps identify why they chose to conduct the study in the way that they did. The Q&A provides additional information worth listening to for… Read more »

S.G.
S.G.
2 years ago
Reply to  Jake

Dude, if that’s your level of consumption that’s ALL blogs like this are. The value is in the details and, for us math geeks, picking apart the numbers and debating assumptions.

dh
dh
2 years ago
Reply to  Jake

The great insight that JD is offering, and thank god for it, is that there are *no special insights!* Did you read his post on magical thinking, because it seems you may be looking for a shortcut. GRS could really be renamed “Facing Reality.” And the reality is that there are no easy solutions or tricks to the money game. All of JD’s content can really be boiled down to, “Work hard and save.” This is a beautiful thing because it’s reality. M. Scott Peck once said that mental health is a dedication to reality at all costs, and that’s… Read more »

Mike
Mike
2 years ago

I will be working longer whether I want to or not because I am still in debt at 38 years old and won’t be paid off for another 6 years, not counting the house. I do have a marginal amount in a pension account, but I likely won’t be able to retire before 65. I’d like to change this, but I don’t think I can save enough in the time I have left.

S.G.
S.G.
2 years ago
Reply to  Mike

You have 27 years between you and retirement, there is PLENTY of time. While it’s great to start saving early and get a leg up, the study quoted doesn’t even consider saving until 36! It’s amazing how quickly things change (unfortunately for worse or better). But you have decided to pay it down, so it’s amazing how just chipping away at it every month will add up. If you don’t have any major setbacks I would be shocked if it takes as long as you’ve projected. And everything will snowball from there. Life doesn’t happen TO you. If you really… Read more »

dh
dh
2 years ago
Reply to  S.G.

Great comment, S.G. I wish you would start a blog!

S.G.
S.G.
2 years ago
Reply to  dh

Thank you for the compliment! 🙂 But I don’t think I could put myself out there all the time like J.D. does. It’s more fun to just be his cheerleader.

Katelyn
Katelyn
2 years ago

I believe the authors are focusing on employer-sponsored retirement savings programs like a 401k… which has an annual contribution cap of $18,500. Anyone under 50 and earning an annual salary of $62k+ can’t contribute as much as 30% of their salary even if they wanted to, let alone increase their contribution amount by 20 or 30%.

So I suppose if you’re already maxing out your 401k your other options besides working longer are limited to earning more, maxing out your IRA, and investing in non-tax advantaged vehicles?

zzzzzz
zzzzzz
2 years ago

I find it interesting, perhaps even ironic, that you’d write a post about the benefits of working longer, given your own history of retiring early, and all you’ve written about your early retirement planning and experience.

OTOH, what worked for you won’t work for everyone else, especially those who didn’t, or weren’t able to, start saving early and often, and it’s helpful for those folks to discuss alternative paths.

Xrayvsn
Xrayvsn
2 years ago

Working longer gives two obvious benefits: You accumulate more from the income and the length of time in retirement decreases (thus you deplete less). But this line of thinking can lead to the “one more year syndrome” and then you will never pull the trigger. The key is to find a nice happy medium where you save enough and work long enough that you can live a long happy retirement at an age you are still young enough to enjoy it. Also time is not guaranteed for anyone. I have a personal story (my dad) who died at age 50… Read more »

Carrera
Carrera
2 years ago

Love the conversation, the actuarial comment, to me seemes quite germaine and isn’t the social security bump like 7 or 8% per year after 62? Seemes like most of the advantage to waiting comes from the SS bump. Thanks J.D. cause of you and others, reminding me that large savings is possible, I’ve changed my life in the last 10 years!

Jennifer
Jennifer
2 years ago

I read the part about working longer, went “huh?” at the 7% or so increase for one year of work, and looked at the paper. When I saw that the assumed savings was just a smidge over $100k for a household, I could see where the extra year would make a huge difference, in both Social Security benefits and extending the payout for the 401k. When I got back to the article, you had already made most of the points I was about to raise in the part I hadn’t read yet. 🙂 Like several here, however, DH and I… Read more »

Renovaten
Renovaten
2 years ago

Why not focus on starting your own business and bring change in your life. To stay set in your life, you should be earning a lot at the end days of your life to be enjoying life at its fullest. I believe in saving a lot but if a person is hand to mouth or barely earning enough, how can he save enough. So the best option one must always keep in mind is Keep thinking about possibilities and try to start your own business as soon as possible. Don’t wait for your retirement and don’t delay the plans you… Read more »

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