We Should All Plan to Delay Retirement by Six Months

Photo credit: Chris Amelung, CC BY 2.0.

MarketWatch recently reported on an interesting economic study about the benefits of working just a few months longer before retiring:

Delaying retirement for just three to six months does to the standard of living after retiring what an entire percentage point of 30 years of earnings would do, according to researchers at Stanford University, George Mason University, Cornerstone Research and Financial Engines. “Working longer is relatively powerful compared with saving more for most people,” they said in the report, recently distributed by the National Bureau of Economic Research.

I went to the source, and it not only argues that working longer increases the amount of money available to you at retirement — which is kind of a no-brainer — but also that working longer is more important than saving more, once you’re near the end of your career:

Working longer is a powerful method to increase retirement standard of living and has a substantially larger impact on retirement consumption than other alternatives, particularly in mid- and late-career circumstances. For individuals who are 30 years away from retirement, extending work for six months or less has the same impact as increasing annual retirement contributions by one percentage point. For near retirees, increasing retirement contributions has even less relative strength.

This doesn’t mean “work six more months without contributing to retirement.” The study assumes that you’ll keep contributing the same amount you’ve always been. (It also assumes you’ll put your retirement contributions in “an inflation-indexed joint survivor life annuity” and that Social Security won’t go under.) In that situation, working longer and contributing the same amount gets you more retirement money than working to your planned retirement age but increasing your retirement contributions right before you plan to retire.

Which, when you put it that way, kind of sounds like a no-brainer too. Except most of us don’t think about retirement like that. From what I understand, we try to play catch-up right before we retire; that’s why the IRS lets us make additional contributions to our IRAs after age 50, right?

But if you worked for just six more months, it’s apparently the same as if you’d saved an entire percentage point extra for the past 30 years. Or, if you want to think about it from the other direction:

[…] increasing retirement saving by one percentage point ten years before retirement has the same impact on the sustainable retirement standard of living as working a single month longer.

That is fascinating.

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