by Eve Kaplan, CFP(R)
Do worries about having enough money to cover retirement keep you awake at night? Do you feel unhappy about having to work many more years in a job you don’t love? Here’s a remedy that offers a reasonable trade-off between continuing to work and beginning to enjoy retirement activities while you still are employed.
This example shows how this new retirement paradigm works.
Let’s say your financial advisor explains you can’t afford to retire now – you need to work another four years. But the advice is more palatable if you reduce savings and use it now to pay for the retirement activities you look forward to.
David and Jane earn $150,000 per year. Both are 63. Their immediate retirement dream is to crisscross the U.S. by trailer to visit all the national parks. Their advisor tells them they need to work to age 67 so they retire on at least 75% of their preretirement income, meaning $113,000 yearly. If they retire now, Social Security and prudent 4% withdrawals from their retirement income only provide 55% of their current income. That’s not enough to sustain retirement into their 90s.
David and Jane aren’t enthusiastic about working another four years, but their advisor creates a new transitional retirement strategy:
POSTPONE SOCIAL SECURITY. First, postpone taking Social Security until David and Jane are 70. Social Security benefits increase by approximately 8% per year from ages 66 to 70. Despite the Social Security income they forfeit waiting until 70, they pull ahead if they make it until 78 or 79. The extra income from the later start date overshadows the money they didn’t collect in their 60s. David and Jane are in good health; their financial planner assumes they will live into their 90s. Meanwhile, they have enough money to cover living expenses from ages 67 to 70.
SCALE BACK ON 401(K) CONTRIBUTIONS. Next, continue to save for retirement, but don’t put in as much as before. Instead of saving $33,000 per year in their 401(k) plans ($16,500 per person, before the contributions their employers match), David and Jane scale back their contribution to $10,000 each. They still benefit from a company match.
TAP THE EXTRA MONEY FOR FUN NOW. David and Jane use the $13,000 that frees up to spend on themselves each year, until they retire at age 67. They use this money to rent a trailer and visit two national parks each year during their vacations.
In sum - David and Jane agree to work an additional four years, but they begin to enjoy some of their retirement activities before they retire. In this example, their advisor projects they will average 82% of their preretirement income throughout their retirement – instead of the measly 55% they would have had if they retired at age 63.
This nuanced approach toward retirement planning fits better with the new realities of work and retirement in the U.S. Retiring often is a prolonged process instead of an abrupt halt.
It’s the job of a good advisor to balance the need for additional assets and savings with the need for retirement activities some people can enjoy before they officially retire. However, I don’t recommend you contemplate making the kind of decision David and Jane made on your own since outliving your assets remains one of the biggest risk the Baby Boomer generation now faces. Careful planning is involved to achieve this type of transitional retirement approach. See your financial advisor for more information.