Risk

The Secret to Saving Less for Retirement: Work Until 70


More than half of all Americans still aren’t saving enough for retirement, according to the latest National Retirement Risk Index from the Center for Retirement Research. This is not a new problem, although it’s gotten worse since the recession. It’s also not hard to see why we continue to fall short.

The report claims that the average 35-year-old needs to save 15 percent of his income each year to ensure a comfortable retirement. Lower-income people need to save less, higher earners more, but regardless, that savings must be devoted just to retirement. Most people are also trying to save for emergencies, education, down payments, home improvements, etc. According to the 2010 Survey of Consumer Finances, only 53 percent of Americans save anything at all, let alone 15 percent for retirement.

But the 15 percent recommended saving rate assumes retirement at age 65. Work until age 70, and you only need to save a far more manageable 6 percent.

Delaying retirement means more years of saving and fewer years of retirement to finance from savings, all things being equal. The bigger factor, though, is Social Security. As of today, taking Social Security benefits at 70 instead of 65 makes a tremendous difference. Take a 35-year-old earning $49,000 per year, the median income for his age. If he retires at age 65, he can expect about $18,200 a year from Social Security. If he waits until he’s 70, he’ll get $26,500 a year, an increase of 45 percent.

Money from Social Security is also more valuable than expected income from savings and investments. It’s more certain. Money from a 401(k) or an IRA may rise and fall with the market; it also has to be converted to income on retirement, and experts disagree about the best way to do that. Assuming no more benefit changes, Social Security is better because it depends only on income, not on the financial markets. Your payments will last as long as you do. They’ll even increase with inflation. Delaying retirement, or at least waiting to take Social Security benefits, may be the only free lunch in retirement planning.

Except that counting on a late retirement poses a risk, too. Some people won’t be able to work until they’re 70. They may lose their job or become too sick or disabled to work. The chances of that are greater for people who earn less to begin with and for those with physically demanding jobs. Even so, the long-term risk may be worth the short-term benefits: a more manageable savings goal and more money to spend in the meantime.

Schrager is an economist and writer in New York City. Follow her on Twitter: @AllisonSchrager.

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