Best Strategy for Retirement - Work Longer or save more now?

Recent articles have recommended that retirees defer collecting social security until the age of 70 because the monthly benefit will increase by 8% between the ages of 66 and 70.  But I wonder if that is the best strategy for everyone?  The math is clearly accurate.  Procrastinators are biased toward a rationalization of avoiding saving and kicking the can down the road.  Those with limited discretionary incomes or living paycheck-to-paycheck may be unable to save so this strategy may be unavoidable.  However, this approach is rarely the best strategy for everyone.

A convincing argument in support of this approach is that saving 1% of your salary a year for 30 years or deferring retirement and social security payouts by just three to six months will provide the same results, according to a working paper from the National Bureau of Economic Research.  Also, Professor Sita Nataraj Slavov at George Mason University’s Schar School of Policy and Government (one of the authors of the above paper) opined that if a high-wage 46-year-old worker would obtain the same result by saving an additional 10% of his or her salary for 20 years or by working an additional 29 months past the age of 66.  Again, the math is convincing because working an additional four years from age 62-66 or 66-70 would increase one’s retirement income by 33% or 32% respectively, wrote Professor Slavov.   

I believe that these arguments are progressively more convincing at older ages because of the shorter times available for the compounding of savings.  Conversely, the younger savers normally outperform because of the power of compounding.

All things being equal, most retirees would be better off with more money at retirement.  Considering that retirement may approach close to one-third of most retirees’ lifetimes, an additional 32% income during retirement may be significant.  But I reject the premise as an ideal planning strategy for everyone.

For those with limited incomes and spotty work histories because of the economy, illness, disabilities, or family needs, working longer could be a financial savior.  However, for older workers unable to work because of health problems, employer downsizing, and age discrimination, working at later ages is not an option.  Reliance on working longer is not a strategy for success, but a possible bail-out for those who failed to plan or faced obstacles that interfered with proper planning.

A consistent and increasing retirement savings program from an early age, even if underfunded, is better than ignoring a future funding challenge.  If unforeseeable income problems occur, the nest egg will help to bridge the gap.  If not, the option to defer retirement for a bigger future is still an available option.

What about those who don’t want to work longer or defer collecting their social security?   More time to enjoy life is the motivator for many retirees.   Younger retirees might succeed by spending less, or accumulating more wealth through work, inheritance or even winning the Lottery.  This group might be divided between those who don’t care about great wealth or expensive toys, and high achievers who seek wealth at younger ages so they have time for discretionary pursuits including travel, hobbies and charitable or public service endeavors.  For those in poor health or shorter life expectancies, time is the most precious commodity. 

Planning for a perfect retirement based on mathematical principles alone is not a plan at all.  It may be a recipe for disaster.  Death is certain but not its timing.  Extremes of over saving and ignoring the enjoyment of life could be as bad as not saving and ignoring the future.  Since the future is always uncertain, those extremes could lead to dying too soon or living too long. 

We believe that the balanced approach of planning for a long lifetime, while enjoying the present, will provide an enjoyable and productive life today and tomorrow.  Everyone is different, so one size doesn’t fit all.  Helen Keller said:  “Happiness depends upon ourselves.” As Certified Financial Planners, our objective is to help clients properly plan for both foreseeable and unforeseeable future events, help them face most challenges, and confidently make their futures as big and happy as they desire. 

Marv Kaye                                                                                                                                          President & CEO                                                                                                                            Kaye Capital Management