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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,” National Bureau of Economic Research Working Paper No. 24226, four researchers offer a fresh perspective: Gila Bronshtein of Cornerstone Research; Jason Scott of Fiancial 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.

The 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 labor 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.

Nonetheless, the researchers say, their “key insight” is that time can dilute the effect of boosting one’s retirement savings rate, in that the longer one waits to boost retirement saving, the less effect it has. The decision regarding how much to save in a retirement account, they say, becomes “less powerful at older ages in changing the affordable retirement standard of living.” Saving an additional 1%, they say, 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 posit. “The impact of working longer relative to saving more increases as individuals get closer to retirement,” they write. Saving adjustments 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 households face when they are new and those who establish them are young are resolved, households should reassess their strategies for financing retirement, and should do so regularly. “For example, households today may wish to re-optimize retirement strategy in light of persistently low real interest rates and wage growth,” they write, adding, “In a standard life cycle model with uncertainty, households continually reassess and reoptimize 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.”