Tuesday, April 3, 2018

The Power of Saving More

The title of this article is a play on a working paper from the National Bureau of Economic Research called The Power of Working Longer. This paper languishes behind a paywall, but the Wall Street Journal interviewed one of the authors, Professor Sita Nataraj Slavov, and this interview is at least temporarily accessible.

One quote from Slavov:
“We found that a 56-year-old would only need to work about a month longer to earn the equivalent of saving an additional 1% of their salary for 10 years.”
I find it funny that it takes a “study” to draw this conclusion. If you save 1% for 10 years, that’s like saving 10% of a year’s pay, or about 1.2 months’ pay. If you invest the money for a return that exceeds the growth in your pay, your savings will grow to a little more than 1.2 month’s pay. So, it shouldn’t be at all surprising that you can get the same benefit by working a little over a month longer.

I guess the message is that we shouldn’t stress too much about not saving enough because we can always make up for it by working longer. But many of us aren’t shorting our savings by only 1% per year for only 10 years. Many will have to work a decade longer to make up for inadequate savings, if their employers will have them. The alternative is a lower standard of living in retirement.

For those of us who have little trouble saving money, reversing this study’s conclusion is more encouraging: to arrive at financial independence sooner, all you have to do is save a little more.

I’m not against the idea of people working longer to make up for a savings shortfall. If working longer is realistic for you, then this option can be a sensible plan. Savers like me prefer to think of higher savings leading to the option to retire sooner.

No comments:

Post a Comment