Saving more and working longer: Two powerful ways to increase your retirement resources

The July 2018 issue of the AAII Journal — the monthly publication of the American Association of Individual Investors — includes an intersting article about how to “increase your retirement resources”. This plain English piece summarizes some of the findings from the authors’ research paper “The Power of Working Longer“.

According to the article, there are three primary factors that determine “the adequacy of retirement resources”. Those are:

  • When a person begins participating in an employer-sponsored saving plan,
  • What percentage of their earnings they save in such a plan (i.e., their saving rate), and
  • At what age they retire and begin taking Social Security benefits.

Until Elon Musk invents a time submarine, it’s impossible for a worker to go back to their youth and begin saving for retirement earlier. Because of this, the authors focused their research on the relative power of saving more and working longer.

Note: To simplify matters, the authors make some assumptions. For instance, instead of investing in the highly-variable stock market, they assume their hypothetical subjects invest in a vehicle with a fixed rate of return: an annuity. This is a little goofy, but helps them come up with more precise numbers than they’d otherwise be able to achieve. Just keep this in mind as we talk about the article’s conclusions.

The Power of Working Longer

First, the authors look at what happens when a person decides to delay retirement by a year — or more. Generally speaking, each extra year worked brings roughly a 7.5% increase to standard of living during retirement. And that’s assuming a real (inflation-adjusted) investment return of 0%!

When you consider that stocks produce a long-term annual real return of about 6.8%, working an extra year has an even greater impact on standard of living in retirement.

Here’s a table from the article that shows the potential increases in standard of living that come from delaying retirement. (All of these numbers assume 0% real returns.)

The Power of Working Longer

As you an see, if a 62-year-old opted to work an additional three years instead of retire, they’d enjoy an increased standard of living of nearly 24%. Working longer is a powerful way to increase your “retirement resources”.

The authors’ research found that while investment returns do have an effect on retirement standard of living, they’re not nearly as large as the effect of working longer. Assuming 0% real returns on investments, delaying retirement age from 66 to 67 leads to a 7.75% increase in standard of living. With a 7% real return (similar to average stock market returns), that one-year delay in retirement brings an increased standard of living of 9.56%. It’s a boost, yes, but not even a boost of two percentage points over assuming zero investment returns.

The bottom line? Each extra year you work past your target retirement age brings a boost of roughly 10% to your post-retirement standard of living. Not too shabby.

The Power of Saving

The real reason this article caught my eye was the authors’ discussion of saving. They dismiss saving rate as being less powerful than working longer, but I’m not sure that I agree. (Remember, I believe that your saving rate is the most important number in personal finance.)

Why are the authors dismissive of saving rate? Their research shows that for each bump of one percentage point in saving rate over thirty years, a person can expect a 2.16% increase in standard of living at retirement — assuming a 0% real return. This same increase could be achieved by working an extra 3.3 months past target retirement age.

But what if instead of assuming a 0% real return on investment, we assume a 7% real return on investment (which is close to the long-term return of stocks)? Then each increase of one percentage point in saving rate over thirty years leads to a 4.79% increase of standard of living during retirement. In this case, it would take six months of extra work to match a one percentage point jump in saving rate.

I think the authors are far too quick saving rate in favor of working longer. They’re working with tiny, tiny fractions. Instead of talking about increasing savings by one percentage point, why not talk about something meaningful, such as an increase to saving rate of ten or twenty percentage points?

Assuming average stock-market returns (instead of 0% returns) — where every one percentage point increase to savings is equivalent to six months of extra work — then we find that by boosting your saving rate for ten percentage points over thirty years means you can retire five years earlier. If you boost your saving rate by twenty percentage points, you can retire ten years earlier. These are significant amounts of time!

To summarize, this article gives us two new financial rules of thumb. First, for each year you work past standard retirement age, you’ll enjoy roughly a 10% increase to your post-retirement standard of living. Second, each percentage point bump to your saving rate is roughly equivalent of six months you don’t have to work.

What if You Start Late?

To me, there shouldn’t be an argument about whether it’s better to work longer or to save more. Both strategies produce notable increases to standard of living in retirement. If we save more now, we’ll have more later. And if we work a little longer, that’ll provide a boost to our standard of living too.

Last of all, I’d like to point out that the authors correctly conclude that the later you start saving, the less powerful saving actually is. If you don’t begin saving for retirement until age 56, there’s far less time for the power of compounding to grow your wealth snowball. As a result, for older folks each percentage point increase to saving rate is equivalent to about a month-and-a-half of extra work (as opposed to between three and six months).

Effects of a Saving Rate Bump

This doesn’t mean that you shouldn’t start saving in your forties and fifties. It just means that the power of saving is diminished. And it means that, realistically speaking, you’ll probably have to work beyond your desired retirement age.

[Increasing your retirement resources: The Power of working longer, AAII Journal]


Ready to Start Adulting? 10 Steps to Retire the Right Way

adulting responsible adults saving money
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This story originally appeared on NewRetirement.

If you are in your 50s or 60s, you are probably hoping to find the fountain of youth. However, when you plan your golden years, it is best to retire like an adult.

The Merriam Webster dictionary has added “adult” as a verb — not just a noun: “To ‘adult’ is to behave like an adult, specifically to do the things — often mundane — that an adult is expected to do.”

Being an adult means being responsible, dependable, self-sufficient, and maybe even knowing when it is a good time to throw these rules out the window. Examples of “adulting” include: cleaning up after yourself, paying bills on time, and — we would like to add — planning your retirement.

Keep reading for 10 ways to know if you have a reliable plan to retire like an adult.

1. You Know How Much Retirement Income You Will Have

Young couple working on a budget
Rido /

It will do you no good to hide from the truth when it comes to your retirement income. You need to know how much you will have and from what sources.

How much will you get from Social Security? Do you have a pension? An annuity? Will you work part-time for any amount of time? And, crucially, how much will you need to withdraw from savings every month?

The NewRetirement Retirement Planner makes it easy to find out how much retirement income you will have every year. And, you can run different scenarios to determine the best retirement withdrawals strategy for your needs and values.

2. Your Retirement Expenses Remain Below Your Income

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The most important rule of personal finance — spend less than you earn — applies to retirement as well. In fact, it is even more important than ever before. The risk you run of overspending is that you will actually run out of money.

The trick is that you actually need to make a good prediction and figure out exactly how much you will spend every year for the next 15 to 30 years.

3. Even Better? You Have Guaranteed Lifetime Income to Cover Basic Expenses

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Guaranteed lifetime income is income that you will receive for as long as you live — no matter how long that turns out to be. Social Security and most pensions are the most common examples of guaranteed lifetime income.

Many personal finance experts recommend that in retirement you have sufficient guaranteed lifetime income to cover your baseline retirement expenses — the money you need to spend to get by. Baseline spending includes housing, healthcare, and food.

To accomplish sufficient lifetime guaranteed income you have two choices:

  • Reduce your baseline expenditures to fall below the income you will have.
  • Increase your guaranteed lifetime income through the purchase of lifetime annuities or other strategies.

Try different scenarios in your retirement plan to figure out something that works for you.

4. You Have Paid Off Debt

Gustavo Frazao /

One of the greatest threats to retirement today may not be saving too little, but owing too much. A 2020 report from Experian found that baby boomers (those ages 57–74) are carrying a significant amount of debt into retirement.

The most adult way to handle debt is to pay it off before you quit working.

5. You Have Planned for Inflation

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When you are working, your wages generally rise as the costs of goods and services increase. Your earnings “keep pace with inflation,” so normal inflation is not generally a big concern. However, when you are living off of savings, inflation literally robs you of income.

The good news is that Social Security and some pension programs (though decreasing in prevalence) adjust your income for inflation. The bad news is that if you are living in retirement by withdrawing from investments or savings, then the value of your money will dramatically decrease over time. You will require far more money to support your lifestyle in the future.

By definition, inflation is when the cost of goods and services increases across the board. Stock prices also rise with inflation for the same reason: As the price of the goods and services a company produces rises, so does that company’s revenue. As a company’s prospects (including revenue) develop and grow, its stock price also tends to rise. As such, stocks can end up serving as a hedge against inflation.

However, as we age, our tolerance for risk decreases. Hence safer investments (such as bonds) become more and more attractive. Reconciling these opposing forces in creating the right asset allocation for you is no easy feat, requiring an understanding of your personal risk tolerance and investment time horizon.

Financial advisers can help you navigate designing an asset allocation strategy that outruns inflation, while managing risk.

6. You Have a Plan for Other Potential Risks

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We can not predict the future. However, an adult retirement plan is one that mitigates the potential harmful financial effects of a long-term health event, a natural disaster, a car accident, a stock market crash, or some other unknowable future event.

Having the right insurance products and a dedicated emergency fund can protect you:

  • Be sure to evaluate your supplemental Medicare coverage every year.
  • Explore ways to cover a long-term care need.
  • Evaluate life, housing, and auto insurance needs.

7. You Evaluate Your Plans at Least Quarterly

couple improving their finances from home
Dean Drobot /

Retirement planning is not something you do once and then never think about again.

You need to maintain, update, and adjust your plans. It is a good idea to go through the details at least once a quarter and make updates as you and the economy change.

8. You Have a Responsible Plan for Investing Your Savings

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Retirement investing is not all about getting the highest return possible. A responsible retirement investment plan matches how and when you need to access the money with your need for growth and security.

It is possible to do this on your own. However, it can also be useful to work with a financial adviser who has deep expertise in stocks, bonds, and other potential financial vehicles.

9. You Have Developed an Estate Plan

estate plan
Kellis /

Estate planning is a term broadly used to describe a variety of end-of-life planning issues. Your estate plan should include:

  • Opportunities to manipulate your assets for tax efficiency and maximum wealth for both you and your heirs
  • A detailed description of what you want to happen when you die — a plan for your internment and for the disbursement of your assets and property.
  • Instructions for what you would like to happen if you are living but cannot care for or make decisions for yourself

Explore the 11 documents you need for a reliable estate plan.

10. You Have a Dream and a Purpose

Young woman with piggybank daydreaming.
Africa Studio /

Without a plan for life after retirement, many retirees find themselves feeling vaguely unfulfilled and restless, craving something more but not knowing what that something might be. Focusing on the financial aspects of retirement is important, but the personal side of your retirement plan is just as important, and could ultimately guide how you use your retirement assets.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.


Retiring: Turn to CDs For Cash Flow

So you’re retiring? Now’s the time to put your CD’s returns to work.

If you are retired and need to fill a gap in your monthly income stream, save for other medium- to long-term goals or supplement your existing investment mix, Certificates of Deposit (CDs)– including Discover’s CDs and tax-advantaged Individual Retirement Account (IRA) CDs — can provide a safe and practical solution.

A simple way to reach your goals.

Watch your savings grow with a CD.

Lock in Your Rate

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  • Supplement cash flow.  CDs can provide a steady source of income that also has the potential for growth. Discover’s CDs, for example, offer guaranteed returns on terms ranging from 3 months to 10 years. The longer the term, the higher the interest rate. And since your rate of return is fixed, you know exactly how much income to expect– and when to expect it (when your CD matures your principal plus interest accrued and not withdrawn is returned to you) –a major plus for retirees looking to close a gap in their cash flow.

One CD strategy for generating cash flow is called a CD ladder. Open a series of CDs that mature at different times. When the first CD matures, harvest the interest income, but reinvest the principal in another CD at the top of your “ladder.” This approach can create a consistent and ongoing income stream to last throughout your retirement years. With Discover CDs, you always have convenient renewal options at maturity, making it easy to put this income-management practice into effect.

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  • Fund medium- and longer-term goals. Open separate CDs with an eye toward funding different financial goals. Will you need to purchase a new car in the next three years? Are you planning an extended trip abroad to celebrate a special anniversary? Do you hope to help a grandchild with college costs? Time the CD maturity to match your savings goal. Again, Discover offers CDs with maturities as short as three months or as long as 10 years.
  • An alternative to bonds. Investors often choose U.S. Treasury bonds when seeking a safe haven for their investment dollars. Yet CDs should be on your list of worthy alternatives. Both Treasuries and CDs offer safety; however, in some cases, CDs offer more attractive yields.
  • A home for excess IRA/401(k) distributions. Current IRS rules require individuals to begin taking distributions from their retirement accounts when they reach the age of 70½ in order to comply with required minimum distribution rules. To the extent that those distributions are more than you’ll need to spend, which may be the case for those who have delayed taking distributions, consider contributing them to a CD until you need to use the funds.

And remember, the safety of Discover’s CDs and IRA CDs being FDIC insured to the maximum allowed by law can be a big comfort when preserving your assets is more important than ever.


Regardless of your time horizon, risk tolerance, or savings goal, you can always find the right savings vehicle for your needs at Discover. Discover offers an Online Savings Account to help you with your short-term savings goals, a full range of CDs and IRA CDs with terms from 3 months to 10 years, and Money Market Accounts that have a competitive rate. Open a Discover account online or call our 24-hour U.S-based Customer Service at 1-800-347-7000.

The article and information provided herein are for informational purposes only and are not intended as a substitute for professional advice.


The Reality of Retirement Planning

Start saving early, make a plan and determine how you’ll use your funds.

Saving for retirement should start early and continue throughout your career.

When planning for retirement, it’s helpful to think of reaching your goals within each of the following categories:

  • Saving for retirement
  • Planning for retirement
  • Using retirement accounts

Start Saving for Retirement Early

In your late teens and early twenties, retirement is probably the last thing on your mind. If you’re lucky, you’ll get advice from your parents or an older colleague to start retirement accounts and put the maximum allowed amount in them – that’s good advice.

Father and son making dinner in the family kitchen

If your employer offers a 401(k), put money into it and request matching funds from the company if offered. You can also invest in an IRA account. These come in many forms. Some are tax-deferred, allowing you to pay taxes at a later date when your taxable income may be lower than today. Others are not tax-deferred, allowing you to avoid paying taxes on these funds when you withdraw them during your retirement.

The earlier you start saving, the more your retirement savings will grow. You might want to teach your children to save for retirement as a financial life lesson. If they have any earned income from babysitting or after-school jobs, help them open Roth IRAs. Explain to them that the money they have saved will grow, earning interest that will be available for them when they retire. This can help to establish good retirement savings habits that will benefit them as they mature.

Starting to save early is ideal. If you haven’t started yet, don’t put it off any longer.

Young professionals meeting over coffee

Plan for Retirement

When considering how much to save for retirement, common advice is to “save as much as you can.” Although this is great advice, it’s not terribly useful. It’s far more helpful to take a practical approach and base the goals for your retirement savings on your future needs.

Establish a retirement budget with expected expenses and income in mind. Do your best to account for the effects of inflation and changes in your spending needs. Analysts suggest that retirees have expenses averaging 75% to 80% of those during their working years. However, don’t rely exclusively on this rule of thumb; use your personal expectations.

Although your expenses will likely decline in retirement, it’s probable that your income will also be reduced. Your total retirement income, including estimated withdrawals from savings sources, will need to meet or exceed your expected expenses for as long as you are retired. If you anticipate that other sources of retirement income won’t cover your needs, you will need to increase your current retirement savings.

One important retirement consideration involves comparing your current taxable income and your expected retirement income to estimate your tax rate now vs. later. This will help you make decisions on whether to use taxed or tax-deferred investments to reduce your lifetime tax burden.

Newly retired couple enjoying an afternoon

It’s also important to consider the question: “When is the best time for me to retire?” The longer you wait to retire, generally the more value you’ll receive annually from retirement accounts, social security payments and other retirement income sources. If you plan to retire early, you may receive lower benefits and you’ll need to have more money in your retirement accounts to ensure you don’t run out of savings during retirement. Check with the Social Security Administration for retirement estimators and other guidance.

A financial planner or online retirement calculator can help you input assumptions to create multiple “what-if” scenarios. Any gap you have in expenses minus annual income is your target annual retirement savings need. Multiply this by the number of years you expect to be retired to calculate how much to save for retirement.

Use Retirement Funds

As the big day approaches, plan for using your retirement accounts for expenses.

  • Notify the Social Security Administration of your plans.
  • Prepare to withdraw required minimum distributions from each retirement account. This should happen by age 7012 for IRA owners that were 7012 prior to 12/31/2019 and by age 72 for IRA owners that would have been 7012 in 2020 and beyond to avoid stiff penalties.
  • Decide whether to withdraw first from taxable or tax-deferred accounts.
  • Apply for Medicare.
  • Consider additional funding plans for health care and long-term care.

Remember: You can’t take it with you…but you don’t want to fall short.