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GRAY MATTER

You’re not totally screwed if you haven’t started saving for retirement yet

By Oliver Staley

If you’re three decades into your working life and have a gnawing sense of dread that you haven’t saved enough for retirement, you’re not alone.

There’s a big swath of generation X workers—those born between the the mid 1960s and late 1970s—who are worried about the state of their retirement savings. Nearly half say they fear they’ll run out of money before they die, 43% say they’re behind in their savings, and 17% say they have no savings at all, according to a TD Ameritrade Survey.

New research, however, suggests all is not lost. There’s hope for workers in their 40s and 50s who didn’t plan ahead 20 years ago. But there is one catch: They may have to work a few years longer.

A new study (pdf) argues that postponing retirement can significantly boost retirement income for Americans. By delaying retirement, workers increase their social security benefits, add to their retirement account balances, and compress the time they’ll need to live off their savings. Retiring at age 66 instead of 62, for instance, can increase a retirement standard of living by a third. Even working a few more months can increase retirement income by 2%.

“Working longer is very, very powerful,” said John Shoven, a Stanford economics professor who authored the paper with a team of former students, in an interview. The study was released by the National Bureau of Economic Research as a working paper, which means it hasn’t yet been reviewed by other academics.

The study doesn’t recommend workers delay their retirement savings. After all, there are few things as miraculous as the power of compounding interest. Instead, it recognizes that as workers gets closer to retirement, there are fewer gains to be had from incremental savings, and that working longer can yield surprising benefits.

That’s particularly true for middle-income Americans who will depend on social security, the government program that deducts income from paychecks and pays it back with interest after retirement. Americans are eligible to collect social security at 62, but the system has built-in incentives to encourage them to work until 70. For every year past 62 that someone continues to work, thus delaying the collection of social security, his or her benefit increases about 8% per year.

Delaying retirement also means workers will have more income to live on once they turn their 401(k)s into income-producing annuities. That’s particularly important because Americans are living longer, and they’ll need to stretch that income out until they die. In 1950, a 65-year old man could expect to live only to age 77. Now he’ll live to be 84, on average, and a woman will live to be 86.

Shoven offers an example of a hypothetical couple that retires when the husband is 64 years old and the wife is 62 years old. ”She might live another 33, 35 years,” Shoven said, noting that women often outlive their husbands. “That’s really hard to finance. If they had just worked another two or three more years, their retirement would be a lot better off.”

Of course, this strategy is a lot easier for employees who both enjoy working and are physically able to continue in their jobs. Factory or construction workers may be unable to labor into their late 60s, Shoven said, but those who could continue working past 62 include teachers, administrators, and cashiers. And economists: Shoven is 70 and still at it.