New research suggests that working for longer might have a bigger effect than saving more
Whether it’s due to market volatility, unexpected expenses or late entry to the retirement-saving game, plenty of Canadians are finding themselves off-track when it comes to building their nest eggs. At that point, they may consider two main courses of action: putting off their retirement, or setting aside a bigger chunk of their paycheque. But which is more effective?
A new working paper from the National Bureau of Economic Research in the US seeks to answer the question, reported the Wall Street Journal. The study has found that delaying retirement and Social Security payouts by just three to six months can have the same impact on retirement income as saving 1% of one’s salary a year for 30 years.
“Social Security benefits are adjusted on a monthly basis, increasing each month the claim is delayed,” Dr Sita Nataraj Slavov, a professor at George Mason University’s Schar School of Policy and Government and one of the paper’s authors, told the Journal. “By delaying retirement by one year, the average worker’s Social Security benefit increases by about 8%. By our calculations, Social Security makes up about 80% of most workers’ retirement income, so that 8% boost is very important.”
According to Slavov, the advantage of working longer over saving more grows as one nears retirement because of the decreasing time for savings to compound. “We are currently studying the effect of low interest rates and stagnant wages on this trend and suspect that these factors strengthen the power of working longer for those approaching retirement because they make it more difficult to save money,” he said.
In Canada, the decision to defer government-provided benefits in retirement can also result in a higher monthly amount. Canadians are eligible to start receiving their Old Age Security (OAS) pension at age 65; each month they delay receiving their OAS pension translates to an additional 0.6% increase in their monthly pension payment, up to a maximum of 36% at age 70. Letting Canadians retire longer may also help provide much-needed relief to overburdened provincial programs.
But as indicated on the Government of Canada’s website, those who choose to defer receipt of the OAS pension will not be eligible for the Guaranteed Income Supplement; their spouse or common-law partner will also lose eligibility for the Allowance Benefit for the period during which the OAS pension is delayed.