Want to retire more comfortably? Work longer.
A Stanford University study on the financial benefits of delaying retirement until age 70 found that seniors can gain a significant amount of Social Security income to help offset drawing down their retirement savings.
The May 2019 joint report by the Stanford Center on Longevity and the Society of Actuaries studied how middle-income retirees can best maximize their financial power so they'll have enough to live on as they age.
"Viability of the Spend Safely in Retirement Strategy" found that working even a few extra years can mean a significant increase in retirement income. Most of the increased income comes from delaying Social Security benefits and not drawing down savings from your retirement account.
The "spend safely in retirement strategy" starts with the assumption that most older workers will fall short of commonly recommended retirement income goals -- unless they can continue to work into their late 60s or 70s.
But there are ways to manage even retirement income.
The spend-safely strategy anticipates that middle-income retirees will rely heavily on Social Security benefits. A previous 2017 study by the researchers found that among middle-income retirees who use the spend-safely strategy to build a retirement income, Social Security benefits represent between two-thirds to more than 80% of the portfolio. The dominance of Social Security benefits in the portfolio dampens the volatility in total retirement income from more aggressive investments, such as having a large proportion of stocks. Social Security benefits protect against the risks of longevity, inflation and market changes. The main drawback is if political winds shift and reduce Social Security payouts, the authors wrote.
The study examined 292 different retirement-income strategies. They also looked at five hypothetical models: people who retired completely at age 62 and started Social Security benefits; those who kept working part or full time until full retirement age 66 1/2; and those who worked part or full time until age 70 before taking the benefits and drawing from their savings.
In one scenario, a 62-year-old, middle-income couple retiring in 2019 has a combined $100,000 household income and $350,000 in retirement savings. Their retirement income would be $70,755 if they worked full time until age 70. If they worked full time until age 66 1/2, their retirement income would drop to $53,031 annually. Retiring at age 62, they would have to live on just $37,585. The amounts are not adjusted for inflation.
Starting with more money doesn't necessarily mean retirees will be better off as they age, the researchers found.
An affluent couple with a $200,000 combined pre-retirement income and $1 million in retirement savings by age 60 would have a retirement income of $69,481 at age 62 and $128,156 if they worked full time until age 70.
Although a seemingly better financial outcome, the affluent couple would also fall short of their common retirement income goals. They would be taking proportionately more income from their savings compared to the middle-income couple. As a result, they have more income subject to the savings-eroding factors, such as longevity, investment and inflation risks, the report found. The researchers suggest the more affluent couple could benefit from refining their strategy or finding alternatives to the spend-safely model.
Since many retirees have inadequate savings, the analysis looked at strategies for boosting retirement income. A large portion of retirement income would come from Social Security, so retirees might put much of their savings in investments such as stocks -- the theory being they have little to lose and potentially much to gain with significant investments.
"If they invest mostly in fixed-income investments, they lock in their modest savings," the researchers said.
They compared retirement incomes based on ages 77 to 80 to see how nominal retirement income amounts might fare under various kinds of investments: annual income with 100% in stocks; annual income with 50/50 stock and bond allocations; and annual income with 100% invested in bonds. Over a 30-year retirement period, despite volatility, the 100% stock investment portfolio out-earned the 100% bonds or even the 50/50 stock-and-bond investments most of the time, but not always, the researchers found.
They acknowledged most retirees would not feel comfortable with a 100% investment in stocks -- even though the allocation of stocks to the total retirement income portfolio would be less than 50% when the value of Social Security benefits are included. Retirees could still benefit favorably with a 75% stock allocation, they said.
There are some savings built into retirement. Workers need a total retirement income that replaces 70% to 80% of their gross pre-retirement income to maintain their standard of living before they retired, the researchers pointed out. They won't need a 100% income replacement because retirees don't pay Federal Insurance Contributions Act payments and Medicare taxes, which account about 7.65% of pay up to the Social Security Wage Base ($132,900 in 2019). Medicare taxes kick in at 1.45% if the income is above the Social Security Wage Base, and are more for higher incomes. Retirees also pay significantly less for state and federal taxes, since a large portion of Social Security income is exempt from income taxes and taxpayers ages 65 and older have larger tax deductions.