• Financial Planning
  • Retirement Planning
  • Delaying Retirement, But Not Your Retirement Dreams

    by Christine S. Fahlund

    Delaying Retirement, But Not Your Retirement Dreams Splash image

    Many investors today who had planned to retire early at 62 when they became eligible for Social Security benefits—albeit at a reduced rate compared with retiring at full retirement age—are discovering that those benefits, combined with their retirement savings, cannot support the lifestyle they expected or provide the financial cushion in retirement they desire.

    Often, they are disappointed to realize they may have to continue working and saving for several more years to catch up. This strategy leaves preretirees in transition with a choice: retire early with insufficient savings and income or delay their retirement dreams until after they retire.

    For some preretirees there may be another, more desirable option. An analysis by T. Rowe Price demonstrates that, if those in their early 60s decide to keep working, but discontinue making contributions to their retirement plans—spending that money instead—they can start fulfilling some of their retirement dreams sooner and still be in a stronger financial position down the road.

    This new transitional strategy involves working longer, but it can provide more discretionary income during transition years to start seriously pursuing your retirement aspirations well before you thought you could.

    And by continuing to work and delaying receipt of Social Security benefits, you are positioning yourself to have potentially higher payments—adjusted annually for inflation—for the rest of your life. This strategy can be much more positive for those in transition.

    A Case Study

    To illustrate how this new strategy could work, let’s consider the hypothetical couple John and Mary Smith. They are each 60 years old, and they have a combined annual income of $100,000 and $500,000 in retirement savings. They have been saving 15% of their income ($15,000) each year in their 401(k) plans and want to retire in two years.

    Here are some possible scenarios (as reflected in the accompanying chart, assuming a 7% preretirement return on investments and a 6% post-retirement return; all dollar amounts are in current dollars at age 60).

    Retire at 62 as Planned

    If the Smiths begin Social Security benefits at 62, they would receive $30,700 a year (plus assumed annual cost of living adjustments of 2.8%). Additionally, they could expect approximate annual withdrawals from their retirement savings of $21,100 (plus annual inflation adjustments of 3%) from age 62 on.

    However, their $51,800 (in current dollars) in annual retirement income would be only 52% of their $100,000 preretirement combined earnings—much less than T. Rowe Price’s 75% general retirement income replacement guideline. In addition, their savings of $500,000 at age 60 would only rise to $526,000 by age 70.

    The Smiths conclude that retiring early will not support the retirement lifestyle they had expected. So they decide to continue working for a few more years and delay taking Social Security until they retire.

    At the same time, they want to enjoy their 60s to the fullest, so they decide to discontinue making contributions to their retirement plan after age 61. This provides them with an additional $15,000 a year to spend while they continue working. With this extra income to enjoy life, working longer may not seem as much of a burden—it may actually re-energize them.

    One of the primary reasons that this new strategy is effective is that each year the Smiths work and delay taking Social Security benefits, their benefits increase about 8% (in today’s dollars)—almost doubling in purchasing power by age 70.

    Because these increases are based on Social Security formulas and not on investment returns, preretirees have a level of assurance that, even if the markets take another turn downward, their Social Security benefits will not.

    Retire at 66

    If the Smiths both work full time until age 66, their retirement income (from savings and Social Security) would be about $68,000, or 68% of their preretirement earnings—much closer to the 75% guideline.

    Their retirement income is now 31% higher than if they had retired at 62—even though they discontinued making retirement contributions. Moreover, their retirement nest egg by 66 would have grown to $665,400 because they did not withdraw savings while working.

    If they worked one more year to age 67, they would be very close to achieving their retirement income replacement rate of 75% with a nest egg of $691,300.

    Retire at 70

    If the Smiths decide to continue working until age 70, without making any additional contributions to their retirement accounts, they could withdraw $34,900 from their savings annually. This, plus their initial Social Security benefits of $54,100, would provide a total annual retirement income of $89,000—an 89% replacement rate and significantly greater than the amount at age 62. Moreover, their retirement nest egg would have grown to about $775,000 by age 70.

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    Table 1. Scenarios for the Transition Years

    Retirement Scenario First Year of Full Retirement for Both Spouses
    Age 62–69
    Balance at
    Both Spouses Fully Retire at Age 62 $413,100 $30,700 + $21,100 = $51,800 $571,400
    Both Spouses Fully Retire at Age 66 $671,300 $40,700 + $27,300 = $68,000 $665,400
    Both Spouses Fully Retire at Age 70 $800,000 $54,100 + $34,900 = $89,000 $775,000
    Both Spouses Work Part Time
    From Age 62 to Age 70
    $400,000 $54,100 + $34,900 = $89,000 $775,000  

    Making Trade-Offs

    In these scenarios, the Smiths had more money to “play with” in their 60s, and they still put their retirement on sounder financial footing. On the other hand, because they were still working, they did not necessarily have as much extra time to pursue their interests as they would have liked.

    If they are willing to trade money for time, the Smiths might consider working part time beyond age 62. This strategy might provide them with the extra income they need to pursue a semiretirement lifestyle without jeopardizing their financial security when they fully retire.

    For example, using the same assumptions, if the Smiths both worked part time until age 70, they would have less to spend in their 60s, but their annual income and their retirement nest egg at age 70 would be the same as if they had both worked full time until then. This is because they were able to delay Social Security benefits and avoid making withdrawals from their savings, which continued to grow.

    Some Caveats

    Not everyone, of course, will be in a financial position to pursue this new strategy.

    Moreover, those who do should avoid tapping their retirement nest egg and delay taking Social Security benefits while they continue working. They should also try to put their financial house in order before they fully retire by paying off their mortgage and other debts and purchasing any big-ticket items they expect to need in retirement.

    While these scenarios call for no further retirement savings to boost income, preretirees should strive to continue contributing at least enough to qualify for an employer match in their 401(k) plans, if available.

    Finding the right time/money balance, as well as the balance between spending and saving while working, will involve trade-offs.

    But this new strategy is likely to give some investors more financial opportunities to pursue their lifelong dreams and enjoy their 60s while also building a stronger foundation for retirement.

    Christine S. Fahlund , Ph.D. and CFP, is a senior financial planner and vice president of T. Rowe Price Group, an investment management firm based in Baltimore, Maryland.


    Benny from MS posted over 5 years ago:

    The only problem with working until 70 is that the expected life span is only 85. 15 years of retirement isn't much and the older you get the less likely your health will allow you to do the things you wanted to do.

    David from IL posted over 5 years ago:

    It also depends on the physical demands of your job. For example, if you are a steel worker your retirement age would be different than if you worked in an office.

    Gary from MN posted over 5 years ago:

    Great strategy if one is physically able. Warren Buffet is 80 and still going strong. Personally, continuing to add value and the feeling of contributing to society through meaningful work may increase our life expectancy.

    Claudia from OR posted over 5 years ago:

    "Working part time beyond age 62" sounds great until you try to find a part time job that includes health care benefits--even partial benefits. Age 62 to 65 is three scary years.

    Ray from SC posted over 5 years ago:

    There is far too much emphasis on early retirement by the media ,little of which is of any value .All other things being equal , work until age 67 and keep yourself in good physical shape

    Thomas from NJ posted over 5 years ago:

    My goal is to work to 67 and keep in shape.

    Tim from PA posted over 5 years ago:

    I like this plan. I am 9 years away from 62 and really don't expect to fully retire, but would like to have more freedom to do things that I am unable to do today because of college and other expenses.

    Randy from FL posted over 5 years ago:

    Life expectancy needs to be factored in to any discussion of retirement. If people knew how much they are reducing their lifetime by smoking, diabetes, high blood pressure, and obesity, maybe they would change their lifestyles. Of course, another factor is being sedentary, so working at a desk and computer can be hazardous to your health! Changing from a desk jockey job to delivering mail or pizzas or the newspaper would be beneficial to your health.

    Nancy from MD posted over 5 years ago:

    I like the idea, particularly when clients have the emotional roadblock to retirement because their income-producing ability has ceased. If they only spent their discretionary money on doing the things they plan to do in retirement may help them to adjust better to the actual retirement event.

    Barbara from NY posted over 5 years ago:

    I like the idea of staying mentally stimulated which a job sometimes provides. If we look at research about brains, it is important to stay stimulated by relationships for helping with brain health.

    So having a lighter work schedule and being able to do more other activities while not using retirement income and funds makes good solid sense to me. One still gets the stimulation from contact with the workplace.

    Erik Johnsson from PA posted over 3 years ago:

    If the couple stop contributing 15k to their qualified plans, they will have less than 15k extra income. The entire 15k will be taxed at current rates. If they are in the 25% bracket, their net additional spendable income will be less than 12k.

    Careful analysis should be completed before making this decision. Factors to consider is the future value of the tax deferral on the 401(k) contribution, and the increased tax bracket that may arise from foregoing the contributions.

    Demetrius Andressakis from IL posted over 3 years ago:

    In general I agree with the strategy. One item I disagree with is the amount you need at retirement as a percent of your income. Let's say that the couple in our example makes 100K a year and needs 75% or 75K to maintain the same life style at retirement. Now, let's assume that the same couple makes 200K but they live on 100K and they invest the rest. Again, in the second case the couple will need 75K at retirement. In other words what you need at retirement it shouldn't be a % of your total working income but a % of the income you spend to live on.

    Richard Nelson from NJ posted over 3 years ago:

    What is the rational of expecting only 75% or that you spend to live on in retirement?

    It would seem that after retirement one would require more more spend as there is now time to time to travel, hobbies, entertainment...

    Neal Mogk from AZ posted over 3 years ago:

    It seems that too little is said about having your mortgage paid off by the time you retire. That's one of our biggest expenses that we expect to be done with by that time, decreasing the amount we need to live on in retirement. In essence, one is pre-paying your biggest living expense, and it's no longer subject to inflation as opposed to some sort of rental.

    Jerry Overman from VA posted over 2 years ago:

    Retired at 62 with nice pension. Will wait until 70 to take SS primarily to assure wife can step up to higher benefit when I pass along. Currently do volunteer work, and small part time job. Wife still works as she is 5 years younger. Now 65 and struggling with all the issues surrounding Medicare and income addition to medicare payments.

    Stephen Tradd from FL posted over 2 years ago:

    The mistake here is that you are following a rule of thumb. Instead of planning that you need 75% of your income calculate your expenses and itemize fixed and discretionary expenses. Many do not live off all their earnings, and there are many expenses that will be less. If you really want to retire early, then maybe you do not travel as much, or travel but be more frugal. If it gets right, slow down on the discretionary spending. But blindly following a rule of thumb (which I have seen ranging from 60-80% of income) doesn't take sense.

    Stephen from FL posted over 2 years ago:

    I hate autocorrect...as seen in previous posted comments

    CHARLIE from COLORADO posted over 2 years ago:

    I'd like to suggest that one should never quit working, for many of the reasons in the above discussion. Work keeps us sharp, mentally and physically; hence the people who start on volunteer efforts.

    The goal for me, by the time I reach "retirement age," is to be set up in activities that provide income but don't seem like work. For example, leave my current corporate job and spend my remaining years taking care of my ranch. Lots of good wholesome physical activity, but it doesn't seem like work because it is so enjoyable.

    Daniel Wickenhauser from IL posted over 2 years ago:

    When I calculate my retirement income against anticipated expenses, SS does not even enter the calculation. I am able to decide on when I start SS based on when I want excess income to my retirement. My thoughts are to get it while I am able to spend it on quality of life, not the extension of life through medical bills and extended care. This is only short sighted if you have not prepared for retirement through your own investments and pensions.

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