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Go a few more miles in your career

Most retirees get far more from Social Security than from savings. The typical govenment payout is bigger than what

By Evan Horowitz Globe Staff 

Pinch pennies. Scrimp and save. Waste not, want not. So much inherited economic advice seems focused on small acts of frugality. But you know what’s even better than decades of extra saving: putting off your retirement, even for a short time.

That’s the conclusion of a new working paper from a team of university economists and financial consultants. For workers seeking to maximize retirement income, it’s often better to keep clocking in five months past your 66th birthday than to increase personal savings by 15 percent every year for 30 years.

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If that sounds implausible — defying every piece of economic advice you’ve ever heard about the virtue of thrift and the miracle of compound interest — the high-level explanation is that people tend to overestimate the importance of personal savings for their retirement. If you expect your senior life to be funded by your 401(k), then it makes sense to assume additional savings will enrich those years.

Except that for most Americans, Social Security plays a much bigger role than savings. And every extra month you spend at work helps to turbocharge your Social Security benefits.

Details vary a lot, based on personal work history and earnings, but a typical retiree who quits work at 66 after a lifetime of decent-paying jobs can expect to receive about $1,500 per month in Social Security payouts. That adds up, given that the life expectancy for retirees is around 84 years. The total value of these payments is about $320,000, after you make necessary adjustments to account for future inflation. For a married couple, with two incomes, Social Security payments can be worth more than $600,000.

These are large numbers, dwarfing the retirement savings of most families. Only the top 10 percent of all US families can claim savings of more than $320,000, while the typical middle-class family has less than $10,000 in total retirement savings, according to an analysis from the Economic Policy Institute.

So while every family’s retirement situation is different, the big picture is pretty clear. Most of us can expect to receive a lot more of our retirement income from Social Security than from savings (unless the federal program is dramatically revamped, which is a long-term possibility but still politically remote).

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That has a major implication for how we prepare for retirement. In particular, it means that increasing our Social Security checks by 10 percent could add up to tens of thousands of retirement dollars, whereas a 10 percent increase in savings would be much less valuable.

In their effort to make this concrete, the recent working paper focuses on a “stylized” worker — fictional, but with common characteristics: no trust fund, no lucky stock picks, just roughly-average wages across a working lifetime. Then they assume that this stylized worker has a pretty generous savings plan, putting aside 6 percent of his or her gross salary every year, buttressed by a three percent employer match.

Over the course of a working life, this totals tens of thousands in savings, but it is still dwarfed by Social Security benefits, which are two to four times larger, depending on assumptions about how well the 401(k) performs.

If you’re wondering how much you can change this by socking away more each year, the answer is a surprising “not much.” The researchers looked specifically at the benefits of boosting your personal savings by around 15 percent every year for 30 years. With a salary of $60,000, that would mean annual savings of $4,200 instead of $3,600 (plus the $1,800 kicked in by your employer.)

Even with a 5 percent return on your 401(k), after inflation, the additional savings only adds about 3.9 percent to retirement income. Instead of $2,500 a month in Social Security and savings — for example — you’d get $2,600. Even that’s probably an overstatement, since 5 percent returns are largely out of reach for those nearing retirement, who are well-advised to shift their money into lower-risk, lower-return options like bonds, which have been paying out less than 1 percent.

And here’s the real kicker. You could get exactly the same benefit merely by working for an additional 5 months and retiring at 66.4 years old.

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Here’s why. When you increase your savings, you only affect your savings account. But when you keep working past your expected retirement date, you actually boost the value of both your savings and Social Security.

One simple effect is that by staying at work, you’re actually shortening your retirement by five months — which means your monthly retirement savings will be spread across fewer months, leaving more per month. Not to mention that during those five months, you’ll get more paychecks, each containing additional employer and employee contributions to your retirement account.

Most important, though, is that Social Security payouts increase with retirement age. Quit work at 67, instead of 66, and your monthly Social Security income will rise by more than 6 percent. Retire at 70 and your combined monthly retirement income — Social Security and savings — would increase by nearly a third.

The benefits of delayed retirement are so strong that it sometimes pays to pretend, delaying Social Security even after you’ve quit work. Particularly for families with two-earners, where one can claim benefits quickly and the other can wait until 68 or 70. In some cases, that strategy boosts total retirement income by tens of thousands of dollars over time.

Of course, not everyone can play these kinds of retirement games. Health problems keep some people from working as long as they’d like, while others find themselves pushed out of jobs to make room for younger — and often lower paid — employees. In which case, savings can be a vital and irreplaceable safeguard.

But that doesn’t change the math. Extra savings aren’t the panacea proverbs would have us believe. Even with good investment returns, they’re likely to have a relatively small impact on the retirement lifestyle of most families. Senior living in America is funded primarily by Social Security.

Evan Horowitz digs through data to find information that illuminates the policy issues facing Massachusetts and the United States. He can be reached at evan.horowitz@globe.com. Follow him on Twitter @GlobeHorowitz.