Tuesday, November 22, 2011

The Benefits of Working Longer .

When it comes to saving for retirement, many Americans are playing catch-up. If you—or a relative—are among them, here is some good news: The belt-tightening required may not be as painful as you might think, provided you are willing to delay retirement for a few years.

According to a new study by the Center for Retirement Research at Boston College, a 45-year-old with no savings who earns $43,000 a year—the nation's average wage—would have to set aside about 18% of pay annually to maintain his or her current standard of living in retirement. (The math assumes a 4% return on savings.)

Such a target isn't much higher than the 12% to 15% annual savings rate many financial advisers recommend for clients in their 20s.

There is a catch, though: In order to maintain his or her standard of living in retirement, the 45-year-old must continue to work until age 70. In contrast, a 25-year-old who consistently saves 15% per year is likely to be able to afford to retire by age 65.

Part of the explanation has to do with Social Security. By putting off retirement until age 70, an individual would receive a benefit that is 75% higher than what he or she could claim at age 62, the earliest date of eligibility. Postponing retirement also gives 401(k)s and other retirement savings accounts additional years to grow. And it shortens the amount of time a nest egg must last.

To make it easier to meet your target savings rate, take advantage of any matching contributions your employer offers in a 401(k) or other workplace retirement plan.

And beware of shortcuts. In a bid to boost retirement savings, some may be inclined to ramp up exposure to equities, in the hope of earning a higher return over time. But such a move will expose them to greater downside risk—without delivering much additional retirement security should stocks fare well.

According to Boston College, a 35-year-old who sets aside 18% of his or her pay and earns a 4% rate of return will be able to retire at age 67; a 6% rate of return lowers the age to approximately 65.

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