The 2008 financial crisis produced sobering headlines about wrecked retirements that could force some men and women to punch the clock for far longer than they had banked on. But that historic market volatility, along with longevity trends, fueled creative thinking about time-money balance and about blurring the line at which working and saving stop and retirement begins.
Analysis by T. Rowe Price shows that, even if some pre-retirees in their early 60s decide to keep working but stop making contributions to their retirement plans, spending that money instead, they can start fulfilling some of their retirement dreams sooner and while they’re physically able. Plus, they’ll maintain a stronger financial position down the road (see figure 1). That’s because as many singles or couples near retirement, their new contributions of savings and investment may not compound fast enough to boost their nest egg. There’s just not enough time. That said, existing nest eggs should remain in well-diversified investments.
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Not everyone, of course, will be in a financial position to pursue this new strategy. Only diligent retirement planning leaves investors in a position to contemplate the timing of their retirement. But by easing into retirement by starting to live a little, pre-retirees are more likely to delay breaking into that egg, taking certain retirement account distributions, and drawing Social Security benefits. Pre-retirees are also prepping with baby steps for the money management, emotional, and relationship challenges that can come with an abrupt 24/7 retirement.
“It’s about delaying your retirement date, but not the gratification,” says Christine Fahlund, Vice President and Senior Financial Planner at T. Rowe Price, which provides research and consultation on the topic in its Practice Retirement® program.
What does it mean in everyday terms? You might first prioritize reducing your debt and gradually paying off your mortgage before you retire. Then, if you are able, spend. That’s right. Cash in some built-up vacation time and take the big trip. Take several trips. Splurge on fly-fishing supplies if you think it’s a hobby that will stick in the Golden Years. Sign on the dotted line for the RV you plan to drive for much of your retirement, all the while collecting a paycheck. With that paycheck, you’ll also likely still be on a healthcare insurance roster, important to your well-being and bottom line. Think about the added strain if you have to tack on medical insurance premiums to a smaller income stream, especially if you’re not yet eligible for Medicare.
Extending a career will be time-consuming and may force would-be retirees to put off pursuing a desired part-time retirement job or lending their expertise to a favorite charity.
It is vital to remember that the strategy only works if retirement nest eggs remain invested and if participants delay taking Social Security benefits while they continue working. Remember, you’re spending from your wages not your savings. Pre-retirees shouldn’t add to their spending, splurging only with those funds they were otherwise stowing away. And while this scenario may not call for further retirement savings to boost income, pre-retirees should always try to keep up with contributing at least enough to qualify for an employer match in their 401(k) plans, if available.
“The ‘Practice Retirement’ resources offered by T. Rowe Price help put time on your side. Your portfolio has more years to compound and grow, as does your Social Security account,” says Fahlund.
Delayed-by-design retirement isn’t an easy concept for all Baby Boomers to accept, says Fahlund. Theirs is a bridge generation that suffered through volatile markets but also clings to their parents’ simpler retirement formula: pension collection (perhaps buttressed by individual retirement accounts) and a hard date for collecting that gold watch and their first Social Security check. For Generations X and Y, creative retirement planning is not only expected, it’s more widely accepted, according to T. Rowe Price and TD Ameritrade research.
Is the collective workplace ready for longer-working Boomers? Fahlund says some employers are cautious about the added cost of insurance but also welcome the benefits of keeping workers with refined skills and institutional knowledge around for longer.
“The Practice Retirement® resources can build awareness with employers and employees to start erasing that ‘dead wood’ mentality when it comes to a silver workforce, the notion that older workers are just getting in the way of younger climbers. That’s a stereotype that I believe the rejuvenated seasoned workers who now mix work and play can help break. Instead, we should be thinking about flexible late-career contracts and mentor programs,” she says.
The traditional view of retirement divides life into two clearly defined stages: working followed by playing. But times are changing. For many, adding a third phase of “retirement transition” may allow for play and financial protection at the same time.