Ready for today’s retirement investing pop quiz?
What’s the single most consequential thing you can do to improve your chances of not running out of money in retirement?
I’ll try answering this question in a minute, but I’ll note first that chances are good that this question isn’t just hypothetical but applies to you personally. A just-released survey of retirees suggests that the vast majority of near-retirees are in dire financial straits. For example, according to the survey from Clever Real Estate:
62% of retirees have not saved enough for retirement (as judged by standard financial planning formulas).
30% of retirees report that they have no savings whatsoever and 75% report that they have debt.
The average retiree outspends his annual income by $4,000.
Clearly, remedial actions are urgently needed.
It’s easier to pinpoint what won’t make much of a difference: Saving and investing more. It’s not that these things aren’t important. But the difference they make is over the long term. If you’re already near retirement, it’s difficult to see how increasing your annual contribution to your 401(k) will move the needle that much once you’re retired.
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This insight was confirmed by a study a couple of years ago by the Center for Retirement Research at Boston College. The study focused on a statistic the Center created which measures the percentage of working-age adults who are at risk of being unable to maintain their current standard of living upon retirement. They call this measure the National Retirement Risk Index (NRRI).
Consider what the authors of the study found when simulating the impact of all working adults increasing their retirement savings contribution rate by 5 percentage points. That’s a huge increase, representing more than a doubling of current rates. And, yet, according to the researchers, this large increase had only a “relatively modest impact on the NRRI.”
The biggest impact of this simulated change was for workers below the age of 40. For workers between the ages of 50 and 59, in contrast, this more-than-doubling of the savings and contribution rate reduced the NRRI by just 3 percentage points.
For those of you near retirement, of course, it’s little help to be told that you should have saved and invested more in your younger years. That just makes you feel worse about yourself. You want to know what you can do that makes a real difference.
The answer to this question provided by the Boston College study: Postpone retirement. The researchers report that postponing retirement by just two years cuts the NRRI by a third.
It has this big of an impact for several interrelated reasons. For the additional years in which you’re working longer, needless to say, you won’t be withdrawing funds from your retirement accounts. In addition, your Social Security benefits will increase by 8% for each year of postponement until the age of 70.
Those are compelling reasons, of course. But, as I’ve written before, there also are compelling nonfinancial reasons for working longer: Early retirement is associated with increased mortality.
It should be acknowledged that not everyone can take advantage of these findings. Many retire earlier than they would otherwise because of deteriorating health, for example. But if you are able, working longer may be the most important single thing you can do to enhance your retirement financial security.
This finding can be humbling for commentators (including me) who like to focus on which retirement investment strategies have the best long-term records. But it’s primarily younger investors who will see the benefit of a better long-term investment strategy. For those nearing retirement, the simple decision to work longer is likely to have a far bigger impact.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at firstname.lastname@example.org.