Start Early, Work Longer to Save Enough for Retirement

November 1, 2011 ( – A report from the Center for Retirement Research (CRR) at Boston College concludes that starting early on saving for retirement and working longer are more effective levers for ensuring a secure retirement than earning a higher return on savings.

The CRR Brief said this strategy of saving for a longer period of time is especially effective given the greater risk that comes from attempting to earn a higher return. Also, the further along an individual is in his or her career, the more effective it is to work a few years longer.  

The report explains that retiring later is an extremely powerful lever for several reasons. First, because Social Security monthly benefits are actuarially adjusted, they are over 75% higher at age 70 than age 62. As a result, they replace a much larger share of pre-retire­ment earnings at later ages – 29% at 62 and 52% at 70 in the CRR’s example – reducing the amount required from savings. Second, by postponing retire­ment, people have additional years to contribute to their 401(k) and allow their balances to grow. Finally, a later retirement age means that people have fewer years to support themselves on their accumulated retirement assets.  

The research assumes an 80% income replacement rate is needed in retirement and assumes Social Security benefits remain as promised under current law, then calculates the required savings rate for individuals at different earnings levels.

The required saving rates the research found for the medium earner, assuming a rate of return of 4%, show that starting to save at age 25, rather than age 45, cuts the required saving rate by about two-thirds. Second, delaying retirement from age 62 to age 70 also reduces the required saving rate by about two-thirds. As a result, the individual who starts at 25 and retires at 70 needs to save only 7% of earnings to achieve an 80% replacement rate at retirement, roughly one tenth of the rate required of an individual who starts at 45 and retires at 62 (65%). The CRR noted that even the individual who starts at 45 has a plausible 18% required saving rate if he postpones retirement to age 70.   

While higher returns require smaller contribution rates, they also come with increased risk. Even ignor­ing risk, the required saving differentials are less than those associated with dates for starting to save and the age of retirement. An individual can offset the impact of a 2% return instead of a 6% return by retiring at 67 instead of 62.  

According to the report, the results for low earners and maximum earners differ primarily because of Social Security. Under current law, at age 67 Social Security will replace 55% of pre-retirement earnings for low earners and 27% for those earning the taxable maximum.   

Lower earners have relatively modest required saving rates if they start early and, more importantly, if they postpone their retirement dates (3% for employees that start saving at age 25 and retire at age 70).  

The study showed that individuals earning the taxable maximum over their lifetime require savings that far exceed the typical 401(k) arrangement of a 6% employee contribution with a 3% employee match. Even those who postpone retirement until age 70 will be required to save between 12% and 29% of earnings. But postponing retirement is the most effective way to get required saving rates into the re­alistic realm – particularly for those who begin saving later, the research concluded.  

The Issue Brief is available at