Here's the Easiest Way to Catch Up on Retirement Savings

It’s no secret that most Americans are woefully underprepared for retirement. But if you find yourself at risk of not having saved enough for your golden years — like about half of American households — take heart.

It turns out that working just a tad bit longer — we're talking as little as a few more months — can be as effective as having saved an extra percentage point of your salary annually for over 30 years, according to a study published earlier this year by the National Bureau of Economic Research (NBER).

How is that possible?

Working a bit longer than you had planned has three layers of potential benefits. “You aren’t spending down your savings. In most cases, you’re probably continuing to save. And you’re delaying taking Social Security,” says Barry Bigelow, lead advisor of the Duluth Branch for Great Waters Financial in Minnesota.

Working longer is a strategy Bigelow has preached to his own clients, he says, but the NBER study underscores the power of stretching out your working years as long as you are able.

“If you look at the cash flow over time it can make a huge difference," he says.

Why Working a Little Longer Makes a Big Difference

The income and savings that come out of working longer is only part of the story.

The biggest gains from working longer come from deferring Social Security – remember, the longer you delay tapping your benefits, the higher the payouts – and not dipping into your savings too soon.

To get at this, the study's researchers looked at the impact on saving more versus delaying retirement for the primary earner of a same-age couple that starts saving at age 36.

Among the other assumptions: The primary earner contributes up to 6% of her salary and receives a 50% company match on 401(k) contributions, for a total of 9% of earnings saved. The base case also assumes she will retire at age 66 and begin claiming Social Security benefits and annualizing her 401(k).

The researchers then looked at the impact of various changes, including shifting into lower cost investments, getting better rates of returns, saving more and, finally, working longer.

In this case, working one year longer, until 67, and deferring Social Security or 401(k) withdrawals would increase the couple’s standard of living in retirement by nearly 8%.

Contrast that to saving an extra percentage point a year for 30 years and still retiring at 66. Assuming a 5% return, that route would improve the person’s standard of living by about half as much.

The reason: Delaying retirement increases all sources of retirement income, the researchers note, whereas saving more only improves one source — your 401(k).

Meanwhile, the impact of working longer versus saving more grows as a person gets closer to retirement. Based on their hypothetical example, working just one month longer is as powerful as saving an extra one percentage point a month for the decade before retirement.

No doubt, the impact varies depending on how much you earn, how much you have saved, and how that relates to your expected Social Security benefits.

The researchers ran the numbers for difference scenarios, including varying income levels and rates of returns, and the results were consistently the same: Working longer had the single biggest impact of any step.

Why Savings Still Matters

This isn’t to say younger savers shouldn’t aim to put away more – and sooner rather than later.

For example, boosting your savings rate from 9% to 10% annually at age 36 with a 5% annual rate of return would increase retirement income nearly 4% the researchers noted; wait until age 56 to up the ante and the effect is a 1% improvement in retirement income – or about the same as working another month before retiring.

What if you can’t possibly work longer? Consider going part time.

“You can still enjoy a little more free time,” says Bigelow, “but you might be able to earn enough to delay claiming Social Security or drawing down on your savings.”