Should You Save More Or Work Longer?

The formula for building wealth is simple: save money, especially early in your career, and allow it to earn compound interest over time.

However, one way to fill in the gap between your target retirement savings and your projected retirement nest egg is to simply delay retirement and work longer.

There was an interesting working paper from Gila Bronshtein and colleagues that studied these two savings options. The paper was later picked up and profiled in the Wall Street Journal.

In Ms. Bronshtein’s study, she concluded that between saving slightly more money over your entire career and working a few extra months before retirement, it is often better to simply work longer.

Let’s look at the rationale for this argument, and see whether it applies to high-income professionals such as doctors.

The Study: The Power Of Working Longer

The study uses both stylized households as well as actual households from the Health and Retirement Study for their analyses.

Starting from a family’s baseline financials, they compared whether adding 1% of savings over their entire career or working for an additional few months before retiring would lead to a higher retirement standard-of-living.

Both options would, of course, increase your retirement standard-of-living:

The Benefits Of A Higher Savings Rate

The benefits of saving more are clear. Especially if done early in a career, additional savings can significantly compound over the years. $1 saved at age 35 that compounds at 8% over 30 years becomes $10 in retirement.

The Power Of Retiring Later

The benefits of working longer are larger than most people realize. Working one more year, rather than retiring, means you are effectively saving 100% of your income for that year, since the alternative was beginning to draw down your savings. For a middle-class individual that may only have 5x or 10x their annual expenses in personal retirement savings (and having Social Security cover the difference), that extra year of work becomes 10-20% of their retirement nest egg.

Not surprisingly, the financial benefits of working longer lead many individuals who otherwise have the financial means to retire to continue working. This is colloquially referred to as the “one more year” syndrome.

Comparing A Higher Savings Rate With A Longer Career

Between these two options, the study concluded that across a wide range of assumptions, working an additional 3-6 months lead to a higher retirement standard-of-living than saving an additional 1% over an entire working career.

The conclusion is attractive, especially to those who have not saved much in the early years of their career. The study reassures workers that if they simply work longer (as little as a few months), they could potentially overcome a career of undersaving.

Limitations Of The Study

Unfortunately, there are several limitations to this study, particularly as it applies to high-income professionals such as doctors.

Assumes you take Social Security at the time of retirement

One of the key assumptions of the study is that the worker will take Social Security exactly when he or she retires. This means that working longer not only increases your nest egg because of the extra income, but it also delays when you take Social Security benefits (and therefore increases it).

But there is no requirement that you start taking your Social Security benefits exactly when you retire. In fact, many (but not all) observers believe it is beneficial to delay taking Social Security until the age of 70. This is feasible for high-income individuals who have built a significant retirement nest egg, but less possible for those who are relying on Social Security to supplement 50% or more of their retirement lifestyle.

High-income professionals rely less on Social Security than other individuals

While working longer may make more sense for middle-income Americans who rely on most of their retirement income on Social Security, physicians and other high-income professionals generally draw most of their retirement income from personal savings.

The study’s authors performed their analysis over a range of incomes, but the maximum income studied was $113,628. Physicians generally make 2-4x this amount, and Social Security only taxes the first $128,400 in income in 2018.

As the authors acknowledge in the paper, “When Social Security replaces a larger fraction of income, working longer is relatively more impactful than saving more.”

Many physicians and other high-income professionals often don’t even include Social Security benefits in their retirement plans, although it’s unlikely that benefits would be cut to zero for even the wealthiest individuals by a future act of Congress.

Who wants to actually work longer rather than retire?

It’s easy to just tell people to work an extra 3-6 months, but that means that their retirements will also be 3-6 months shorter. Not only do you lose 3-6 months of your retirement, you lose the early part of your retirement when you are the most active.

While working an extra 3 months before retiring may be equal to saving an additional 1% over an entire career, it doesn’t account for the relative effort of the two options. Saving an additional 1% may be hard for the average American who is only saving the national average (6.8% in June 2018), but it shouldn’t be difficult at all for the physician who is already saving 25-30% or more of their after-tax income.

Saving an additional 1% for high-income professionals is usually about reducing discretionary expenses, while saving an additional 1% for middle-income individuals may involve cutting back on essential spending.

The decision to save more versus work longer is a personal decision. Many people don’t want to work longer if they don’t have to. And even if you were to end up with more money if you worked longer, I’d say most people would rather trade that extra money for an additional few months of retirement.

Conclusion

Working longer will obviously boost your retirement nest egg, as will delaying Social Security. But it should not be done in place of saving a significant amount of your income, especially early in your career. Most physicians would rather have the option to retire earlier than they planned, rather than be resigned to working longer than they had hoped to make up for a low savings rate or poor market returns.

What do you think? Would you rather save an extra 1% of your income throughout your career or work an extra 3 months at the end of your career?