Retirement Savings Delays Quickly Add Up

Recent Insured Retirement Institute (IRI) research shows postponing retirement plan salary deferrals by five to 10 years can reduce total retirement income by more than 20%.

IRI researchers found that a worker contributing 10% of income annually to a retirement plan beginning at age 35, rather than age 30, will receive 11% less in annuitized retirement income. Over the course of a 25-year retirement, the reduced income adds up to $62,000, according to the IRI. If saving for retirement is postponed to age 40, income will be reduced by 23%, totaling $127,000 over a 25-year retirement.

“There’s no lost and found for retirement savings,” says IRI President and CEO Cathy Weatherford. “When saving for retirement is delayed, the benefits of compounding interest are gone and can never be reclaimed.”

Delaying retirement will only partially recover lost savings and may not even be feasible for some workers, Weatherford says. “And those who believe they can simply save a higher percentage later on will be in for sticker shock when they realize how much of their income will need to be dedicated to retirement savings to make up for lost time,” she adds. “Few workers can afford to contribute 25%, 35% or even more of their annual income to their retirement plans.”

Other key findings from the report, “It’s Time to Save for Retirement,” show a worker who starts to contribute to a retirement plan at age 35 would need to save 16.5% of annual income to have the same amount of retirement income at age 65 as a worker who started contributing 10% annually at age 30. If the worker delays contributing to the retirement plan until age 40, he or she would need to save more than 26% of income annually to achieve the same level of retirement income at age 65, the report finds.

Importantly, delaying retirement can grow savings substantially through additional annual contributions and investment earnings. A worker who begins saving 10% of income annually at age 30 can increase his or her retirement income by about 73% by delaying retirement and annuitizing at age 70, rather than age 65. A worker who contributed 10% of income annually to a retirement plan beginning at age 35—rather than age 30—would receive only 7.6% less in his or her annual retirement income at age 70, compared with the 11% reduction experienced if retirement began at age 65.

However, many workers are forced to retire earlier than hoped for or expected, the IRI report notes, so delaying retirement is not always an option.

The full report is available here.