Should I Save More or Retire Later? How to Improve Your Retirement Plan

One of the most common retirement planning questions is surprisingly difficult to answer: Should I save more or retire later?

If your retirement plan is not quite where you want it to be, there are usually several ways to improve it. You could increase your savings, reduce your spending, work longer, retire later, increase your income, change your investment strategy or adjust your retirement income target.

But saving more and retiring later are two of the most powerful levers because they affect a retirement plan from different directions.

Saving more gives you more assets. Retiring later gives you more time to accumulate assets while potentially reducing the number of years your portfolio needs to support you.

So which is better?

The answer depends on your situation.

More importantly, you do not have to guess. You can model both options and compare the results.

Why Saving More Can Improve Your Retirement Plan

Saving more is one of the most straightforward ways to strengthen a retirement plan.

Additional savings can increase the amount of money available for retirement and give your investments more capital to potentially grow.

Suppose you are currently saving $20,000 per year and decide to increase that to $30,000.

The additional $10,000 does more than simply add $10,000 to your retirement account. If invested, those additional contributions may also generate future investment growth.

The earlier you make the additional contributions, the more time they potentially have to compound.

This is one reason increasing your savings rate can be particularly valuable when retirement is still several years away.

Saving More Can Also Reduce Your Retirement Spending Target

There is another important relationship between saving and retirement.

If you increase your savings by reducing unnecessary spending, you may also reduce the amount of money you will need to support your lifestyle after you stop working.

Imagine someone earns $100,000 and spends $85,000.

If that person finds ways to reduce annual spending to $75,000 and invests the difference, two things happen:

• More money is being invested for retirement.
• The eventual retirement spending requirement may be lower.

That combination can make reducing expenses particularly powerful.

However, this does not mean that everyone should simply cut spending as aggressively as possible. A retirement plan should support a life you actually want to live.

Why Retiring Later Can Improve Your Retirement Plan

Delaying retirement can also have a significant effect on your financial future.

If you work an additional year, you may:

• Earn another year of employment income.
• Make additional retirement contributions.
• Allow existing investments more time to potentially grow.
• Reduce the number of years you need to fund from your portfolio.
• Delay withdrawals from investment accounts.
• Increase certain pension benefits depending on the plan.
• Potentially increase government retirement benefits depending on timing and eligibility.

This means delaying retirement can affect both sides of the retirement equation.

You may have more assets while simultaneously needing those assets to support fewer years of retirement.

Saving More vs. Retiring Later

Consider a simplified example.

Suppose you are 55 years old and would like to retire at 60. Your current retirement portfolio is $750,000, and you are saving $25,000 per year.

You have two potential strategies.

Option A: Save More

You continue working until 60 but increase annual savings from $25,000 to $40,000.

You are putting an additional $15,000 per year toward retirement.

Option B: Retire Later

Instead of increasing your savings substantially, you continue saving $25,000 per year but retire at 63 instead of 60.

You now have three additional years of employment income, contributions and potential investment growth, while also reducing the number of years your retirement assets need to support you.

Which option is better?

There is no universal answer.

The result depends on your investment assumptions, spending, income, taxes, pensions, government benefits, account balances and other circumstances.

This is exactly why comparing the two scenarios can be more useful than relying on a general rule.

The Hidden Benefit of Working Longer

One of the most important differences between saving more and retiring later is that working longer can affect your retirement plan in several ways simultaneously.

Imagine delaying retirement by three years.

You might receive:

• Three more years of employment income.
• Three more years of retirement contributions.
• Three more years of potential investment growth.
• Three fewer years of portfolio withdrawals.
• Potentially larger pension benefits.
• Potentially larger government benefits depending on your situation.

That combination can make a relatively small change in retirement age have a surprisingly large effect on a long-term projection.

However, financial optimization is not the only consideration.

Working three additional years may also mean giving up three years of the retirement lifestyle you want.

That tradeoff matters.

The Hidden Benefit of Saving More

Saving more also has advantages that are easy to overlook.

Higher savings can provide flexibility.

A larger investment portfolio can potentially allow you to:

• Retire earlier.
• Handle unexpected expenses.
• Reduce dependence on future employment income.
• Support a higher retirement income.
• Leave a larger estate.
• Have more options if circumstances change.

Increasing savings can therefore improve more than just the projected retirement date.

It can increase your financial flexibility.

What If You Combine Both?

The decision does not have to be either-or.

Perhaps you could save more and delay retirement by one year instead of making either change extreme.

For example, you might:

• Increase annual savings by $5,000.
• Retire one year later.
• Reduce planned retirement spending slightly.
• Continue working part time after leaving your primary career.

The combined effect may produce a stronger plan without requiring one major lifestyle change.

This is one of the most important ideas in retirement planning: moderate changes can work together.

What If You Want to Retire Earlier?

If early retirement is your goal, the question becomes even more important.

You may want to know whether saving significantly more today can allow you to retire several years earlier.

Alternatively, perhaps working another two years would allow you to retire with substantially more financial flexibility.

There is no need to assume that your first retirement date is the only possible date.

Test several possibilities.

For example:

• Retire at 55.
• Retire at 57.
• Retire at 60.
• Retire at 62.
• Retire at 65.

Then compare the amount you would need to save under each scenario.

For more on evaluating early retirement, see Can I Retire Early? How to Know If You Can Afford Early Retirement.

Consider Your Current Savings Rate

Your current savings rate can help determine which strategy deserves more attention.

Someone saving 5% of their income may have considerable room to increase savings before retirement.

Someone already saving 30% or 40% may have less opportunity to increase contributions without making significant lifestyle changes.

The same is true for retirement age.

Someone planning to retire at 50 may have much more flexibility to delay retirement than someone who is already 64 and planning to retire at 65.

The best strategy depends on where you are starting.

Consider Your Income

Income also matters when deciding between saving more and retiring later.

If your income is likely to increase significantly, future savings may be much easier to achieve.

On the other hand, if your income is uncertain, it may make sense to build more financial flexibility into your plan today.

Additional income from employment, consulting, a business or part-time work can also change the calculation.

A retirement plan should therefore consider not just your current salary but the income you realistically expect to receive before and during retirement.

Consider Your Retirement Spending

Your spending target may be even more important than your savings balance.

A person with $1 million invested may have a very different retirement outlook depending on whether they need $40,000 or $80,000 per year.

Before deciding whether you need to save more or work longer, make sure you have a realistic estimate of your future spending.

Include expenses such as:

• Housing
• Food
• Transportation
• Healthcare and insurance
• Travel
• Entertainment
• Taxes
• Home maintenance
• Major purchases
• Gifts and family support

Also consider whether spending will change over time.

Early retirement may involve more travel and activities, while later retirement years may have different spending patterns.

Do Not Forget Pensions and Government Benefits

Retirement savings are only one part of retirement income.

Depending on where you live and your individual circumstances, your retirement income may also include employer pensions and government benefits.

In the United States, this can include Social Security and other retirement benefits.

In Canada, retirement income may include programs such as CPP and OAS, along with employer pensions.

The timing and amount of these income sources can affect whether saving more or delaying retirement produces the better result.

For example, delaying retirement could provide additional employment income while also changing the timing or amount of future retirement income.

A retirement plan should evaluate these income sources alongside your investment portfolio rather than treating your savings as the only source of retirement income.

Taxes Can Change the Answer

Two retirement strategies that look similar before taxes can produce different results after taxes.

Your tax situation may change as your income changes, as you retire and as you begin withdrawing from different types of accounts.

The location of your investments and the timing of withdrawals can therefore matter.

This is another reason why a simple retirement calculator based only on investment balances may not provide a complete answer.

Your retirement plan should consider the interaction between income, withdrawals, taxes and government benefits.

Learn more in How Taxes Affect Your Retirement Plan.

Compare the Two Strategies Using Your Own Numbers

The most useful way to answer the question is to model both scenarios.

Start with your current retirement plan.

Then create one version where you save more.

Next, create another version where you retire later.

Finally, create a third version that combines both strategies.

Compare:

• Projected retirement age
• Investment balances
• Retirement income
• Portfolio withdrawals
• Taxes
• Pension income
• Government benefits
• Remaining assets later in life
• Ability to withstand unexpected changes

You may be surprised by the result.

How Retirementize Can Help Compare Your Options

Retirementize is designed to help you explore these kinds of retirement decisions rather than simply produce one retirement number.

You can build a retirement plan using your income, spending, investments, pensions, government benefits, housing and other important financial information.

Once your plan is established, you can change important assumptions and decisions to see how your projected retirement changes.

For example, you can compare a scenario where you:

• Save more each year.
• Retire one or more years later.
• Retire earlier.
• Reduce or increase your retirement spending target.
• Change investment assumptions.
• Change the timing of retirement income.
• Adjust housing assumptions.
• Test other What-If scenarios.

Instead of asking whether saving more or retiring later is theoretically better, you can ask which option produces the better result for your plan.

What If the Answer Is Neither?

Sometimes the best answer is not simply "save more" or "retire later."

You may discover that another change has a larger effect.

For example, reducing retirement spending by $5,000 per year may improve your plan more than increasing annual savings by $5,000.

Or changing your housing plans could have a larger effect than delaying retirement.

Or working part time for two years could provide nearly the same benefit as remaining in a full-time career for another year.

This is why retirement planning should be treated as an exploration of options.

Test Before You Decide

A retirement plan is most useful when it helps you make decisions before you make them.

If you are considering increasing your savings, test it.

If you are considering retiring later, test it.

If you are considering retiring earlier, test that too.

You can also test combinations:

• Save 10% more and retire one year later.
• Save 20% more and retire two years earlier.
• Keep savings the same and work part time.
• Reduce retirement spending and retire earlier.
• Increase savings while changing your retirement income target.

The purpose is not to predict the future perfectly.

The purpose is to understand how different decisions could change your financial position.

There Is No Universal Retirement Age

Retirement age is sometimes discussed as if there is a universally correct number.

There is not.

Some people may want to retire in their 50s. Others may prefer to continue working into their 60s or beyond.

The right retirement age depends on financial resources, health, career satisfaction, family circumstances, lifestyle goals and personal priorities.

Financial independence gives you more choices, but the goal is not necessarily to stop working as soon as possible.

The goal is to have the financial flexibility to make the choice that is right for you.

PLAN. IMPROVE. TEST. CONFIRM. REPEAT.

The question of whether to save more or retire later fits naturally into the Retirementize planning process:

1. PLAN. Build a realistic retirement plan using your income, spending, assets, pensions, benefits and goals.
2. IMPROVE. Identify opportunities to save more, spend more efficiently, increase income or adjust your retirement strategy.
3. TEST. Compare saving more, retiring later, retiring earlier and combinations of different strategies.
4. CONFIRM. Identify the strategies that appear to provide an acceptable balance between financial security and the lifestyle you want.
5. REPEAT. Revisit the plan as your income, spending, investments, retirement goals and circumstances change.

Your retirement plan does not need to be perfect today.

It needs to help you make better decisions over time.

Fun Facts About Saving More and Retiring Later

Continue Exploring Your Retirement Options

This article is part of the Retirementize financial freedom and retirement planning series.

If you are considering early retirement, read Can I Retire Early? How to Know If You Can Afford Early Retirement.

You can also explore 10 Ways to Improve Your Retirement Plan and Retire With More Confidence and How to Reach Financial Freedom Faster.

Once you have a plan, the next step is to test it. Read How to Test Your Retirement Plan and explore different Retirement What-If Scenarios.

Testing different retirement decisions can help you understand not only whether you can retire, but what changes could make your retirement plan stronger.

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