Working One Year Longer can Increase Your Retirement Income 7.75%

Odds are you’ve heard the usual nuggets of wisdom about saving for retirement: start when you’re young, increase your savings rate every year, be mindful of investment fees, and never, ever take an early withdrawal.

Those tips may all be true, but they overlook what might be one of the most powerful strategies of all — working a little longer.

The results of extending your working life are profound. Delaying retirement just three to six months can have as much of an impact as saving for 30 more years.

These were the findings of a study published by the National Bureau of Economic Research (NBER) in 2018, in which researchers looked across a wide range of scenarios to understand how working longer affected retirement outcomes for people nearing retirement.

“The results are unequivocal,” the researchers noted. “No reasonable amount of additional saving could impact the retirement standard of living so significantly.”

Understanding the equation

One of the best ways to ensure long-term savings is to start early and make regular contributions to an Individual Retirement Account (IRA) or an employer-sponsored plan, such as a 401(k). And when you get a pay raise, aim to bump up your savings as well.

That said, for people in the final stretch of their working lives, every additional day, week and month add up.

In their base assumption, the researchers studied a hypothetical 66-year-old who is the primary earner and started saving 9% of her salary — including employer contributions — starting at age 36. For simplicity, the researchers assumed zero wage growth and asset returns.

Here's what they discovered:

  • If that person saved an additional 1 percentage point, bumping up her total contribution to 10% of her salary over 30 years, it would improve her retirement income a little more than 2%.
  • On the other hand, if she kept her contribution at 9%, but worked a year longer, her retirement income increased by 7.75% — or roughly three times the impact of saving more for 30 years.

The key reasons working longer can improve your retirement outlook? For one thing, it gives you a little more time to save while also delaying when you start spending your savings. More importantly, it decreases the likelihood that you'll need to claim Social Security benefits before you reach full retirement age, thus incurring a reduction of benefit.

The perks of continuing to work

A growing number of Americans are working longer, and not just for financial reasons. Because people are living longer and, in many cases, are healthier, they often want to extend their careers, notes Steve Vernon, a consulting research scholar at the Stanford Center on Longevity and author of Retirement Game-Changers.

For many people, this creates a virtuous cycle. People later in their lives who are social, feel a sense of purpose and keep their minds active are often less prone to mental and physical decline. In a study of more than 83,000 older adults published in the CDC journal Preventing Chronic Disease, people who worked past age 65 were about three times more likely than those who retired to report being in good health. 

Meanwhile, companies are starting to cater to older workers by offering more flexible work arrangements that make it possible for them to scale back on working hours without fully retiring. 

In a survey of 143 large U.S. employers conducted by Willis Towers Watson in late 2018, 30% of employers surveyed have made it easier for older workers to change positions — from a manager to an individual contributor, for example — and that share could increase to more than 50% by 2020. And roughly a quarter offer part-time employment as an option to late-career employees, and that number is expected to increase to 45% by 2020.

Manageable steps to ease into retirement

For would-be retirees who hope to work a little less but improve their retirement security — part-time work offers an ideal solution.

A growing number of people are finding that retirement doesn’t have to mean quitting a career cold turkey. On the contrary, many people in the aging workforce are finding new ways to extend their careers — but with fewer hours and less stress — or find new avenues to earn a paycheck. Working a little longer is no substitute for saving for retirement, but it can be a sound strategy for improving your retirement outlook — and getting other benefits along the way.