What to do if your retirement savings fall short

With so many older workers approaching their retirement years with meager savings, the big question is: What can they do to improve their financial security in retirement?

Working longer is by far the best step they can take, according to "The Power of Working Longer," a recent paper written by a team of researchers led by John Shoven at Stanford University.

If you're in your 50s or older, working longer -- even by a few months -- has a much greater impact on your ultimate retirement income than saving more or achieving a higher net rate of return on your savings. Of course, ideally, older workers would take all these steps -- the paper just helps you focus on the most important one.

The report offers several examples that illustrate the power of working longer, using hypothetical workers of various ages. For example:

  • Workers age 66 who earn at the national average wage could increase their ultimate retirement income by 7.75 percent by working one more year and retiring at age 67.
  • For these workers, the total value of the additional lifetime retirement income generated by working for one more year is equal to getting a bonus of over 40 percent (43.27 percent) of this average wage earner's annual salary.
  • Workers age 62 who earn average wages could increase their ultimate retirement income by almost one-third (32.7 percent) by working four more years until age 66 and by almost three-fourths (74.6 percent) by working eight more years until age 70.

(The report estimates that average annual wages for workers age 55 to 64 are about $52,350.)

Here are three reasons working longer increases your retirement income:

  • Your Social Security income will increase significantly -- by 8 percent for each year beyond your full retirement age that you start benefits.
  • Your savings have more years to grow with investment returns.
  • Your savings need to last for a shorter number of years in retirement.

The paper shows that delaying Social Security accounts for most of the total increase in your retirement income -- roughly three-fourths of it.

For low-wage earners, delaying Social Security benefits is particularly powerful. For example, consider such an earner at age 56: Delaying retirement by seven months has roughly the same impact as saving an additional 10 percent of pay for 10 years.

Many older workers aren't willing or able to keep working at their current rate of pay or for the same number of hours. But you may not need to do either. For instance, you could pursue a "downshifting" strategy during which you reduce your hours and responsibilities, and earn just enough to cover your current living expenses while you let your Social Security and savings grow until you ultimately retire. 

This strategy might free some time to enjoy life more and take care of yourself, and you'll still reap most of the benefits of working longer described above.

It's important to acknowledge that working longer may be "easier said than done" for many older workers. They'll need to be resilient and creative to find work opportunities, and working longer will most likely take some planning. While working longer may not be the ideal solution, it may be the best option that many older workers have.

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    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.