When you can’t retire early, 'practice'
Use your 60s to ease out of the working life
Is that dream of retiring early - at 55 or perhaps 62 - slipping away?
Many would-be retirees know this scenario painfully well: Their nest eggs took a huge hit during the financial crisis and recession, and investment returns since then haven’t been enough to get them back on track.
Fee-only financial planner Jill Boynton of Cornerstone Financial Planning in Newington, N.H., has seen the pain. “Lots of people don’t have as much as they had hoped,’’ said Boynton. These days it’s not uncommon to see people who are 10 percent shy of what they had hoped to spend annually in retirement, she said.
But those not quite willing to give up on the dream might consider an alternative approach. Christine Fahlund, a senior financial planner for T. Rowe Price, suggests people consider using their 60s as a “practice retirement,’’ where they keep working, but stop funding retirement plans and use the money to have fun.
What does “practice retirement’’ look like? Instead of retiring and sailing around the world, you might keep working and simply buy a boat; rather than spending the winter on a Florida golf course, take a deluxe golf vacation. Spend a week at cooking classes in Paris, on a bike trip, or seeing Broadway shows in New York.
“The idea is to have your employer fund the fun,’’ Fahlund said.
Moreover, diverting those 10 years of retirement savings to discretionary income has a much smaller impact on retirement than one might expect. By continuing to work, you keep both your salary and your workplace benefits intact. Moreover, each year you delay retirement eliminates a year that has to be financed with savings.
Given today’s life expectancies, that can have a big impact on the numbers. According to the Society of Actuaries, some 13 percent of men and 20 percent of women now aged 65 will still be alive at age 95. Retiring early for them would mean funding more than three decades of retirement with assets accumulated during roughly four decades of work. Simply staying in the workforce a few more years makes that equation easier to balance.
Then, too, there’s the fact that delaying Social Security greatly increases your benefits. Waiting to age 70 almost doubles the annual purchasing power compared with starting benefits at age 62, Fahlund said. And those higher benefits are not only indexed to inflation, but will continue for the rest of their lives.
Consider the example of a couple, each age 60, with a combined salary of $100,000 and a $500,000 nest egg. They’ve been tucking away 15 percent of their annual salary in their retirement plans. If they retire at 62 and start taking Social Security, they end up with an annual retirement income of $51,974 and about $526,000 in retirement savings when they hit age 70.
If they keep working to age 70 and fund their retirement plans at 15 percent, they’ll have a more comfortable retirement with an annual income of $96,240 and a nest egg of $917,951.
But if they decide to stop funding their retirement at age 60 and don’t retire until age 70, they’ll still be in good shape. Granted, their annual retirement income drops by about $8,300 and their nest egg will be about $186,000 smaller. But they will have had a full decade to enjoy that $15,000 a year in discretionary income.
Based on these numbers, the “practice retirement’’ couple will have a cool $1 million in income from working during their 60s. That compares to just $606,392 for the couple who stopped getting paychecks and retired at 62.
Boynton, the New Hampshire financial planner, likes the practice strategy, saying it could make life more palatable for people who have to work a few extra years. It certainly makes more sense than simply trying to adjust the numbers to make the early retirement equation work, she said.
“I definitely will not reduce somebody’s longevity just because they tell me to.’’ Her retirement plans are based on people living to age 95.
But practice retirement isn’t for everyone. Some people simply don’t want to keep working. They may be burned out or have physical limitations that make their present job untenable. Others may want to start tapering off. “They say ‘I don’t really want to retire, but I don’t want to work as hard,’ ” said fee-only financial planner Barbara Nevilscq of Nevils Financial in Wakefield.
One final advantage of practice retirement is the ability to practice, Fahlund said. “You can make mistakes while you still have salary and benefits.’’ Of course, some people will want to tweak the system, perhaps contributing just enough to their workplace retirement account to get the employer match.
Even folks who are in good financial shape may want to embrace the practice approach to deal with the emotional and psychological aspects of leaving the workforce.
“Retirement means a lot of adjusting,’’ Fahlund said, noting that people may find the reality isn’t quite what they expected. “It makes sense to test the waters.’’