Set to retire? Consider working a bit longer

Saving and investing for retirement are important. But at a certain stage for most people, another strategy is far more powerful: working a little longer.

That is the message of an academic study stuffed with provocative nuggets.

Say you are 36 and plan on retiring in 30 years. You are already saving but realize that you will need more money. You can increase your savings by 1 percent every year until you are 66, or extend your working life by three to six months. Those few extra months on the job are likely to raise your retirement income by the same amount as those 30 years of extra savings.

If you are older, the numbers are more startling. Say you are 56 and realize that you need more retirement income when you stop working in 10 years. You can save 1 percent more every year until you are 66 — or work for just six extra weeks.

The study, “The Power of Working Longer,” is eye-opening. It acknowledges the validity of trimming investment costs, investing through workplace retirement plans and saving as long and as much as you can. These are all time-tested approaches.

But it suggests that retirement planning might not be focusing sufficiently on a basic truth: As pensions vanish and the stock market gyrates, Social Security remains the most stable pillar in most people’s retirement. Increasing annual Social Security income by working longer — optimally, until at least age 70 — will improve financial security more than anything else most people can safely accomplish.

The study, a National Bureau of Economic Research working paper, was written by John Shoven, a Stanford economist, and three of his former students: Gila Bronshtein, an associate at Cornerstone Research; Jason Scott, a retirement expert at Financial Engines; and Sita Slavov, a professor at George Mason University.

In an interview, Shoven said some affluent people might not need to worry about these issues. Social Security is unlikely to account for a major part of retirement income for very high-income people — those who earn, say, $500,000 a year, he said. (The researchers do suggest a way for the wealthy to profit, as we shall see.)

But, Shoven said, “Social Security is a very important, and often the most important, source of retirement income for 85 percent of the people in the United States, and that’s a conservative estimate.”

So for most Americans, he said, increasing that monthly Social Security check can have an outsize impact. And because Social Security is progressive — replacing a higher proportion of income for lower-income people — the impact of working longer is greater for those with less money.

The paper compares working longer with maneuvers aimed at increasing retirement income, like saving more.

The study (including the examples cited above) generally assumes that you are already saving 6 percent of your paycheck and that your employer is contributing 3 percent.

For example, suppose that in 2013 you were 46 years old, earning about $114,000 a year and rethinking your retirement plan. You might save an additional 10 percent of your salary, until retiring at 66. The paper demonstrates that working two years and five months more would have the same effect on your monthly retirement income.

It also shows that for most people, improving investment returns and cutting costs will have the same effects on monthly income as modest amounts of extra work.

Of course, there is no need to adopt just one approach. Do everything that you can to prepare, the paper says, but don’t forget the power of working longer.