The life-changing magic of working a bit longer

Retirement experts frequently recommend working longer if you haven't saved enough. But you may not realize just how powerful a little extra work can be.

Researchers who compared the relative returns of working longer versus saving more last year reached some startling findings. Among them :

-- Working three to six months longer was the equivalent of saving an additional 1% for 30 years.

-- Working just one extra month was similar to saving an additional 1% for 10 years before retirement.

-- Delaying the start of retirement from age 62 to age 66 could raise someone's annual, sustainable standard of living by 33%.

This is potentially great news for people in their 50s and 60s who are able and willing to stay on the job. But younger people shouldn't use the findings as an excuse to ignore their 401(k)s, since many people retire earlier than they planned.

"I would see this as a positive message for people who maybe didn't save as much as they could have and they're wondering what to do," says researcher Sita Slavov, a professor of public policy at George Mason University in Arlington, Virginia, and a faculty research fellow at the National Bureau of Economic Research. "I would not use this to advise younger people not to save."

Potentially higher standard of living

The study, which Slavov co-authored with her former Stanford University professor John Shoven and two of his other students, Gila Bronshtein and Jason Scott, first compared the effects of saving more, working longer or trimming investment expenses. They used theoretical households who save 9% of their salary over 30 years starting at age 36. Then they looked at actual households from the University of Michigan's Health and Retirement Study, which tracks thousands of people 50 and over. The trends were the same: Working longer had the biggest impact on the household's standard of living in retirement.

That makes sense. When you're young, your savings have decades for compounded returns to grow. Likewise, keeping investment fees low means more of your money is available to compound. So an increase in savings or decrease in expenses can have an outsized impact.

When you're older, your savings have less time left to grow: The runway ahead of you is shorter. So working longer starts to have the biggest effect.

Most of the benefit comes from delaying the start of Social Security checks, the researchers found, but continued contribution to retirement accounts and delayed withdrawal from those accounts are also factors. You're not required to start Social Security when you retire, or vice versa, but most people do, Slavov notes, so the study was structured to reflect that.

What claiming at 62 can cost you

Starting Social Security at 62, the earliest age you can claim retirement benefits, means locking in a permanently smaller check. Your check could be as much as 76% larger if you waited until age 70, when your monthly benefit maxes out. Delaying increases your checks by about 7% each year between age 62 and what's known as your full retirement age: currently 66, but rising to 67 for people born in 1960 and later. After full retirement age, your benefit rises by 8% each year you delay.

The advantages of delaying Social Security typically are so great that many financial planners now recommend clients tap other resources, including retirement funds, if that allows them to put off claiming.

Thanks to current low interest rates, there's no other investment that gives such a high, guaranteed return.

And while the larger checks are designed to compensate for the fact that people who claim later will receive fewer payments over their lifetimes, longer life expectancies mean that most people will see more money overall by waiting. Delaying is particularly advantageous for the higher earner in a married couple and for single people, Slavov's previous research with Shoven found.

Their latest research shows that, overall, lower earners benefit even more from delay than higher earners.

Again, that makes sense, because Social Security is progressive. It's designed to replace a larger proportion of lower income people's earnings. The more you rely on Social Security, the more it can pay to wait -- if you can.

Slavov acknowledges that job loss, bad health or the need to care for a loved one often can push people into retirement earlier than they planned. (A 2018 TransAmerica study found 56% of the retirees surveyed retired earlier than expected.)

"These results really apply to people who have the option of working longer," Slavov says.

"Obviously, that's not going to be an option for everyone."