Retirement fund keys: Work longer, start saving earlier

Investing dominates most discussions of retirement planning. How much are you saving in your 401(k), 403(b) and similar retirement savings plans? What's your asset allocation in the portfolio, your mix of stocks, bonds, and cash?

Yet, despite all the focus on investing and asset allocation, for most people the most powerful levers on achieving a decent living standard in retirement have little to do with their investing strategy.

What does matter for most people? Working longer. Reduced spending. Maybe a reverse mortgage.

"Strikingly, the typical 401(k)/IRA balance of households approaching retirement is less than $100,000, which suggests that the net benefits of portfolio reallocation have to be modest for the typical household," write scholars Alicia H. Munnell, Natalia Sergeyevna Orlova and Anthony Webb in their paper "How Important is Asset Allocation to Financial Security in Retirement?"

"Given the relative unimportance of asset allocations, financial advisers will be of greater help to their clients if they focus on a broad array of tools -- including working longer, controlling spending and taking out a reverse mortgage."

The paper by the scholars from the Center for Retirement Research at Boston College is detailed and runs through several scenarios. I want to highlight what I thought was an especially telling set of numbers. For the median wage earner -- and assuming a rate of return on assets of 4 percent in their 401(k) and IRA -- starting to save at age 25 rather than age 45 cuts the required savings rate for an adequate retirement income by about two-thirds. However, delaying retirement from age 62 to age 70 also reduces the required savings rate by some two-thirds.

"In summary, starting early and working longer are far more effective levers for gaining a secure retirement than earning a high return," they say.

The solution for most people will be to work well into the traditional retirement years. The retirement income boost comes from several sources. For one thing, Social Security benefits are more than 75 percent higher at age 70 than at age 62. Earning at least some income allows for additional savings. You have to support yourself off your savings for a shorter period of time.

To be clear, the insight isn't a brief for ignoring retirement savings. You should set aside the maximum or as close to the maximum as you can. The impact of asset allocation on living standards is greater for upper income households, too, since they have multiples of $100,000 in retirement savings.

Instead, the message of the Center for Retirement Research study and others like it is that our definition of planning for retirement should move well beyond thinking about financial assets. The focus should be on education, on-the-job training, networking and maintaining your health, all actions that make it easier to work longer. Similarly, reducing spending in the years leading up to retirement boosts household finances in retirement.