As pensions vanish and the stock market gyrates, Social Security remains the most stable pillar in most people’s retirement.

Share story

Saving and investing for retirement are important. But at a certain stage for most people, another strategy is far more powerful: working a little longer.

That is the message of an academic study stuffed with provocative nuggets.

Say you are 36 and plan on retiring in 30 years. You are already saving but realize that you will need more money. You can increase your savings by 1 percent every year until you are 66, or extend your working life by three to six months. Those few extra months on the job are likely to raise your retirement income by the same amount as those 30 years of extra savings.

If you are older, the numbers are more startling. Say you are 56 and realize that you need more retirement income when you stop working in 10 years. You can save 1 percent more every year until you are 66 — or work for just six extra weeks.

The study, “The Power of Working Longer,” is eye-opening. It acknowledges the validity of trimming investment costs, investing through workplace retirement plans and saving as long and as much as you can. These are all time-tested approaches.

But it suggests that retirement planning may not be focusing sufficiently on a basic truth: As pensions vanish and the stock market gyrates, Social Security remains the most stable pillar in most people’s retirement. Increasing annual Social Security income by working longer — optimally, until at least age 70 — will improve financial security more than anything else most people can safely accomplish.

The study, a National Bureau of Economic Research working paper, was written by John Shoven, a Stanford economist, and three of his former students: Gila Bronshtein, an associate at Cornerstone Research; Jason Scott, a retirement expert at Financial Engines; and Sita Slavov, a professor at George Mason University.

In an interview, Shoven said some affluent people might not need to worry about these issues. Social Security is unlikely to account for a major part of retirement income for very high-income people — those who earn, say, $500,000 a year, he said. (The researchers do suggest a way for the wealthy to profit, as we shall see.)

But, Shoven said, “Social Security is a very important, and often the most important, source of retirement income for 85 percent of the people in the United States, and that’s a conservative estimate.”

So for most Americans, he said, increasing that monthly Social Security check can have an outsize impact. And because Social Security is progressive — replacing a higher proportion of income for lower-income people — the impact of working longer is greater for those with less money.

The paper compares working longer with maneuvers aimed at increasing retirement income, like saving more. The study (including the examples cited above) generally assumes that you are already saving 6 percent of your paycheck and that your employer is contributing 3 percent.

For example, suppose that in 2013, you were 46 years old, earning about $114,000 a year and rethinking your retirement plan. You might save an additional 10 percent of your salary, until retiring at 66. The paper demonstrates that working two years and five months more would have the same effect on your monthly retirement income.

It also shows that for most people, improving investment returns and cutting costs will have the same effects on monthly income as modest amounts of extra work.

Of course, there is no need to adopt just one approach. Do everything that you can to prepare, the paper says, but don’t forget the power of working longer.

One source of this power is the structure of Social Security itself. While you can draw benefits at 62, monthly payments will be much higher if you wait for two thresholds: the inaptly named “full retirement age,” now 66 and rising to 67; and 70, which is when full benefits really kick in.

In one hypothetical case on the official Social Security website, for example, monthly benefits rise 76 percent through delaying retirement from age 62 to 70.

The deeper explanation of this strategy is grim. Retire later and you will have fewer years left to live. That saves Social Security money, and, by working longer, you can save more, too. In addition, reducing your retirement life span reduces how long you must live on whatever you’ve stashed away during your working years. A shorter life expectancy will also reduce the cost of a lifetime annuity purchased on the open market.

On the other hand, Social Security is itself an annuity — one based on outdated estimates of American longevity, Shoven says, making it a better deal than can be found on the commercial market. In a separate paper, “Leaving Big Money on the Table: Arbitrage Opportunities in Delaying Social Security,” the same scholars point out that you can profit from Social Security by deferring benefits even if you stop working. This is an “arbitrage opportunity,” the researchers say, especially for those wealthy enough to be able to get by until 70 without a paycheck or Social Security.

Most people really need Social Security to survive, but many will find that working longer isn’t appealing or even possible.

Do you hate your job? Is working even a minute longer utterly intolerable? Even if it isn’t quite that bad, maybe you have an overwhelming urge to leave work behind? The authors use bland economic jargon to describe that quandary: “The disutility of work would have to be very high” to outweigh work’s financial benefits.

But even if you want to work, you may not be able to find a suitable position in your 60s. And if your life expectancy is short — if you know you don’t have much time left — working longer may be foolish on multiple levels, the most mundane being that you won’t be around to collect much money.

If you don’t start benefits at “full retirement age” — say, 66 — and wait until 70, when the monthly payments are higher, how long will it take to make up for the lost money? Using my own estimates from Social Security, I determined the answer: My personal “break-even point” is 12 years.

That seems all right to me. Social Security says my life expectancy is 84 or 85 years. I’ll come out ahead financially if I live that long. And the kind of work I do seems worthwhile enough to try to continue doing it until at least age 70.

Plus, my wife may collect higher survivor benefits if she outlives me, and she probably will, the mortality tables say. It seems a good bet that at least one of us will live long enough to cash in. (You can find the Social Security benefits estimators here.)

There are many ways of looking at this. If you’re wealthy enough, these considerations may not matter. But I’m thinking my personal retirement plan should probably include working longer, if I possibly can.