One of the most effective ways of ensuring a prosperous retirement is simply to work longer. That’s the message of new research by Stanford University’s John Shoven and colleagues. “Working longer is a powerful method to increase retirement standard of living and has a substantially larger impact on retirement consumption than other alternatives,” they say.
To see the point, let’s take a simple example. Consider someone in work with a post-tax income of £40,000 a year who saves £8,000 and spends £32,000 and who wants to maintain that spending in retirement. If he works a year longer his pension pot will not decline by the £32,000 it would have done had he retired. And he’ll save an extra £8,000. He’s £40,000 better off, before we consider any return on that £40,000.
Imagine, by contrast, that he’d saved an extra one percentage point of that income (assuming it was flat in real terms throughout his career). Even if he’d made a real return of 5 per cent per year on those savings, he’d have made just over £26,000.
An extra year of working, therefore, does more to boost our retirement savings than 30 years of modestly extra savings.
In fact, this understates the benefits of working longer. Doing so means you can enjoy a higher annuity rate or safe drawdown rate on your savings. This isn’t to be sneezed at. If you can draw down 4.1 per cent of your assets rather than 4 per cent per year, it is equivalent to having an extra £12,500 on a pension pot of £50,000.
You also have an extra year in which you are less exposed to investment risk. While you are working you can top up any losses on your investments by saving out of your salary. When you retire you lose this cushion.
There’s more. Retiring is to some extent an irreversible investment, although how much so differs from person to person: it’s much easier to keep a good job than it is to find one after you’ve quit. This means that working is, in effect, a call option on retiring. And options are valuable the higher is uncertainty. You can spend the extra time in work by deciding how best to enjoy your retirement, and to resolve any lingering doubts about whether you really have had a bellyful of the petty stresses of employment.
In fact, thousands of people have learned all this already at the university of life. The proportion of 50-64 year-olds in work has risen from 65 per cent in 2007 to over 71 per cent now. And the proportion of over-65s has risen from seven to 10 per cent in this time.
Working longer is, then, a good way of financially preparing for retirement. This is like the fact that success in life doesn’t depend on merit or hard work. It’s one of those truths we shouldn’t tell young people. Doing so might deter them from saving in the belief that they could instead work longer in their 60s – and to someone in their 30s this is so distant a prospect that it doesn’t trouble them.
But it should trouble them because there is a big disadvantage to working longer.
You might have an inkling what it is. And research by George MacKerron and Alex Bryson has confirmed it. They sent phone messages to more than 26,000 people asking them at various times of the day what they were doing and how happy they were. They found that among the 39 activities they considered, only one made people more unhappy than doing paid work – and that was being ill in bed.
What’s more, older people in work were just as miserable as younger ones and those on high incomes were even more unhappy than the badly paid. Work, therefore, does not become more bearable as you get older or better paid.
I suspect there’s a simple reason for this. As we get older we become more aware that the clock is ticking. We therefore become more aware of the fact that there are better things to do than what Stanley Unwin called “worky nosey grindstone”. In long economicky words, the opportunity cost of our time increases. This offsets the tendency for our job to become more tolerable when we are older than when we were doing the grunt work of youngsters. I suspect that rise in the numbers of over-65s in work owes more to low interest rates than to a discovery of the joys of employment.
There’s more. Underneath all the guff, there are really only things that can go wrong with your personal finances: either you’ll outlive your wealth or your wealth will outlive you. The latter would – for me at least – be a source of bitter regret at having sacrificed my life for futile work, especially if I were to become ill quite young, which is a significant risk. “The man who dies rich, dies disgraced,” said the Scottish industrialist Andrew Carnegie. He should have added that he also dies disappointed. The desire to minimise regret is a powerful motive. For me, it is a case for retiring early.
Working longer might, then, be an effective way of making money. But it comes at a high cost. As Mr Carnegie also said: “There is no class so pitiably wretched as that which possesses money and nothing else.”
