By: David I Gensler, MSPA, MAAA, EA
When I looked at various top ten lists of what people fear the most, public speaking was invariably number one. Also making the top ten list was a fear of heights, flying, snakes, spiders, zombies and clowns. But I noticed that a new fear had emerged. And as baby boomers age out of the work force, it seemed to be moving up the list rather rapidly (although I doubt that it will ever replace the fear of public speaking as number one). That fear is the very real concern about running out of money in retirement.
The fear of running out of money in retirement has multiple layers to it: How long will I live? What sort of income will I need in retirement? How much money will it take to secure that income? What if another recession causes the stock market to materially reduce my account balance just when I need it the most? There are at least a half dozen other factors that I can think of that play into this equation. These variables, some of which are out of our control, cause many of us to take the “ostrich in the sand” approach. In other words, if I don’t think about it, maybe it will go away. (Spoiler alert – It won’t).
As folks get nearer and nearer to retirement, it is assumed that it is too late to make any corrections that might impact the amount that you will have in your retirement account. But it turns out that is not necessarily so. Every so often, I read something and then have to read it again to make sure that it said what I thought it said. That happened to me recently in reviewing a summary of “The Power of Working Longer” from the National Bureau of Economic Research, Working Paper No. 24226. In this white paper four researchers offer a fresh perspective on this topic.
The researchers found that delaying retirement, even for fairly short periods of time can have the same impact on your standard of living in retirement that a small increase in your savings rate can have over a much longer period of time.
This is the part that jumped out at me: 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. They found that:
- Delaying retirement by three to six months has the same effect as saving an additional one- percent (1%) of your wages for 30 years before you retire, and
- Delaying retirement by just one month has the same effect as increasing retirement savings by one percent (1%) of your wages for 10 years before you retire.
Both of these statements caused me to go back and read them again. It just seemed counterintuitive that delaying retirement by three to six months could have the same effect as saving 1% more for retirement over a period of 30 years. But there it is.
Clearly, the longer you wait to increase your retirement savings, the longer that you need to work to make up that gap. And of course the longer that you wait the less effect it has on your retirement savings.
The researchers point out that working longer may pay off better for those who are close to retirement than making a minimal increase in your savings rate. As individuals get closer to retirement the impact of working longer increases relative to how much they save. Conversely, those employees that still have years to go before they retire should focus on raising their savings rate.
No matter what stage a household is in, whether they are near retirement or just starting out, researchers urge that they continually reassess what their needs will be in retirement and then make the appropriate adjustments. That is the only way to ensure that you are on track for a comfortable retirement.