Retirement & Financial Planning Report

When an individual chooses to start saving for retirement and when that person chooses to begin making withdrawals of the accumulated savings "are pivotal decisions and can make the difference between a secure or insecure retirement," according to a study by the Center for Retirement Research.

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The study used an 80 percent "replacement rate"–how much of pre-retirement income will be available in post-retirement years to maintain the same standard of living–and also used another common assumption, that a retiree will withdraw 4 percent of savings each year.

It gave the example of someone who would need to replace about 40 percent of income (with defined retirement benefits from Social Security or other annuities making up the rest) and started saving at age 35 and planning to retire at age 67. If that person earned 4 percent after inflation on investments, he or she would need to save 18 percent of income each year to achieve the replacement goal.

However, starting those savings at 25 and delaying retirement to age 70 would reduce the required savings rate to only 7 percent of salary.

In contrast, that same person if not starting to save until age 45 and planning to retire at age 62 would need to save more than 60 percent of income during that time–a rate the report called "impossible."

The report noted that achieving a lower rate of return can be offset by continuing to work several years longer, and that attempting the opposite, achieving a higher rate of return, involves more investment risk.

"In summary, starting early and working longer are far more effective levers for gaining a secure retirement than earning a higher return. This strategy of saving for a longer period of time is especially effective given the greater risk that comes from attempting to earn that higher return. And the further along people are in their career, the more effective working a few years longer becomes," it said.