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If you haven't turned 70 yet, don't retire

Stanford researchers find that working longer can be a boon to 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.

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.

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Comments

9 people like this
Posted by A Talking Cat
a resident of Old Mountain View
on Nov 6, 2019 at 9:49 am

A Talking Cat is a registered user.

…and if you keep working forever and never retire, you'll keep accumulating money until you die! :/


3 people like this
Posted by Common sense
a resident of Another Mountain View Neighborhood
on Nov 6, 2019 at 9:52 am

Work until you die, retire in grave.


10 people like this
Posted by Gov. pension-benefits
a resident of Sylvan Park
on Nov 6, 2019 at 10:10 am

Gov. pension-benefits is a registered user.

That "transparent California" link on the story about the pay raise for the retiring CITY MANAGER provides some information. It shows high pay for most and abuse of overtime by some. At what age can city employees retire and what is the retirement compensation formula?


8 people like this
Posted by USA
a resident of Old Mountain View
on Nov 6, 2019 at 12:39 pm

USA is a registered user.

To be clear, your retimement date and your start date for Social Security are two different dates. For example, you can retire for work at 62 then spend 8 years living on 401k, pension funds, general savings, and sale of your big house. As that money draws down over the 8 years, you then kick state Social Secutrity at 70 to kick in that $70k/yr.


4 people like this
Posted by mvdad
a resident of Whisman Station
on Nov 6, 2019 at 2:26 pm

mvdad is a registered user.

Or we can tax the rich at 90% like we did in the 50s and everybody can comfortably retire at 55.


7 people like this
Posted by Does not pencil out
a resident of Another Mountain View Neighborhood
on Nov 6, 2019 at 2:34 pm

Middle income = combined $100,000 household income. Affluent $200k household income? Where was this study done, Iowa?


6 people like this
Posted by Nonsense
a resident of Cuernavaca
on Nov 6, 2019 at 2:37 pm

While you can obtain 32% higher SS benefits at age 70 compared to age 66 the tradeoff assumes you will live until your mid 80's. I think most people realize based on their lifestyle , they are unlikely to live that long and make the correct decision to take benefits at age 66. The report fails to take into account the opportunity cost of waiting and the appropriate discount rate to use.


13 people like this
Posted by Fritzi
a resident of another community
on Nov 6, 2019 at 2:45 pm

Who is going to hire you or keep you working between age 66 and 70? Do you see many workers in that age bracket in our tech offices? When I read this advice I laugh, thinking of the many lay offs, time spent as a contractor trying to get back on board as a full time employee. Unless you are a professor, lawyer or Dr, it’s not too likely you will keep your job till you make 70.


4 people like this
Posted by Bruce England
a resident of Whisman Station
on Nov 6, 2019 at 3:57 pm

I agree with USA. Get out when you can, away from that desk, into the fresh air. Your health will improve and hold longer. Retirement will provide limited benefits if you wind up suffering from various work-related maladies. No thanks. With the extra time, by the way, you can accomplish more by volunteering in the community with your new-found time available to you.


Like this comment
Posted by Groot
a resident of Willowgate
on Nov 7, 2019 at 1:18 pm

Groot is a registered user.


You’ve never seen a hearse with a trailer hitch for a reason


4 people like this
Posted by Bill
a resident of Rex Manor
on Nov 9, 2019 at 8:26 am

This study is very flawed. Average death age 78 for a male. You can retire early if you do not live in CA and pay very high taxes and keep your good health longer. How much income do you really need if you live a frugal life? Retirement should be about the maximum length for quality of life not economic basis that assumes you should work longer for a certain income level and then spend you last few years in declining health.


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