Odds are you’ve heard these four nuggets of wisdom about saving for retirement:
1. Start when you’re young.
2. Increase your contribution rate annually.
3. Be mindful of investment fees.
4. Only take an early withdrawal, if necessary.
However, there’s another powerful strategy worth considering: Working a little longer.
The result of extending your working life can be profound. In fact, delaying retirement just three to six months can have as much of an impact as saving an additional one percentage point for 30 years, research shows.
Understanding the equation
In their base assumption, the researchers studied a hypothetical 66-year-old who is the primary earner and started saving 9 percent 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 percent of her salary over 30 years, it would improve her retirement income a little more than 2 percent.
- On the other hand, if she kept her contribution at 9 percent, but worked one year longer, her retirement income increased by 7.75 percent—or roughly three times the impact of saving 1 percent more for 30 years.
What are the key reasons working longer can improve your retirement outlook? For one, 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 in benefits. “The results are unequivocal,” the researchers wrote. “No reasonable amount of additional saving could impact the retirement standard of living so significantly.”
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, which can help create a virtuous cycle: They’re more socially connected, feel a sense of purpose, and may experience improved mental and physical well-being.
Working past age 65 has been associated with a lower risk of dying and better reported overall health, compared to those who retired. Meanwhile, companies are starting to offer more flexible work arrangements that make it possible for employees to work from anywhere. For would-be retirees who hope to work a little less but improve their retirement security, flex work offers an ideal solution.
Keep in mind that working a little longer is no substitute for saving for retirement. However, it can be a sound strategy for improving your financial outlook and getting additional quality-of-life benefits along the way.