Question: Which of these has the greatest effect on your retirement standard of living?
- Saving an additional 1% of your salary for the 30 years prior to retirement.
- Postponing your retirement by 3 to 4 months.
MarketWatch’s recent article, “The single most important retirement strategy,” says that a new study by the National Bureau of Economic Research found that the two options have roughly the same impact for the majority of investors.
No, really! It’s hard to believe because not spending 1% of your salary for each of 30 straight years seems like a much bigger sacrifice than working for a few more months. However, the researchers base their conclusion on rigorous statistics and straightforward, plausible assumptions about the typical retiree. The study, “The Power of Working Longer,” conducted by Cornerstone Research, Financial Engines and professors at Stanford and George Mason Universities, shows the importance of focusing on what matters the most.
The number of additional months of work required to offset a 1% greater savings rate, depends on your lifetime rate of return. If your retirement portfolio’s performance merely equals the inflation rate over the 30 years before retirement, you’d need to work a little more than three more months to increase your retirement spending by as much as it would be by saving 1% more for 30 years.
Even if you beat inflation by 8% annualized, you still wouldn’t need to work much longer to hit the same increase in your retirement standard of living. Even under the assumption of that good a return, working about six-and-a-half more months ups your retirement standard of living by just as much as a 1% greater savings rate for 30 years.
The study’s conclusions don’t apply to the super-wealthy, those with retirement portfolios worth millions or more. The study is relevant to the 95% who are not in the upper end of the income distribution. The researchers say there are four primary reasons why working longer has such a large impact on retirement standard of living:
- Your Social Security benefits will be higher the longer you delay retirement;
- You’ll contribute more to your 401(k) or retirement portfolio the longer you work;
- Your retirement portfolio will be able to grow more the longer you delay retirement; and
- The older you are, you can buy a better annuity for the same amount of money.
Reference: MarketWatch (June 26, 2018) “The single most important retirement strategy”