do Fahlund and T. Rowe Price
suggest that you stop saving
for retirement once you hit age
60; they encourage you to take
the money you were previ-
ously putting into your 401(k)
or other retirement account
and—brace yourself—spend it.
On fun stuff. “Your 60s should
be a time when you start to
enjoy yourself more,” Fahlund
says. “Take more trips. Spend
time with the grandkids. Buy
the boat or put in the pool
you’ve been dreaming of.”
And here’s the kicker: If you
follow their advice, you could
end up with a higher income
in retirement than you might
have otherwise.
Is this a joke? Did Fahlund
and company just snooze
through the Great Recession?
It’s not, and they didn’t. What
T. Rowe Price calls “practice
retirement” could, in fact, be
a realistic option for you. But
there’s a big catch. Two catch-es, in fact. You have to have significant
savings by the time you hit 60. And you
have to commit to working well past
your early 60s, because you’re going to
live off that income while your savings
and your Social Security benefits sit
untouched, gaining in value.
You may already be postponing your
retirement: More than 60 percent of
workers say they expect to retire at
age 65 or later, according to the most
recent survey by the Employee Benefit Research Institute, up from 45
percent in 1991. But few view the prospect with enthusiasm. Working longer
is Plan B, a sign that something went
wrong in your retirement schedule.
“Practice retirement” operates from
a different set of assumptions. Steven
Sass, director of the Financial Security
Project at the Center for Retirement
Research at Boston College, says most
people think the point of working lon-
ger is to sacrifice and save. That’s not
it. “The payoff of working longer,” says
Sass, who coauthored Working Longer:
The Solution to the Retirement Income
Challenge, “is that you can preserve
your retirement savings and delay tak-
ing Social Security.” Medical research-
ers have long known that staying on the
job pays benefits to the mind and body.
By protecting your nest egg, enhancing
your benefits, and limiting the number
of years your stash needs to support
you, working longer has a similar effect
on your financial health.
And that creates some opportuni-
ties, including the one at the heart of
Fahlund’s suggestion: Put yourself in a
position where you can afford to stop
saving, or at least slow down, when
you reach 60. Then: Live a little. “Get
back to looking forward to your 60s as
a time to be enjoyed,” she says. “You
are delaying retirement, but you don’t
have to delay enjoyment.”
Still sound too good to be true? Here
are some answers to your probable
concerns:
You’d need to save a fortune to take
“practice retirement” at age 60.
Obviously, you can’t stop saving at
age 60 if you never really started.
You need a healthy sum of money in
the bank. But the required
amount may be less than
you’re probably thinking.
The table at left estimates
how much you need to squir-
rel away by age 60 to be able
to turn off the savings spigot
at that point. What you’ll
need depends on your cur-
rent income, as well as the
date when you expect to start
tapping your savings and col-
lecting Social Security. Bot-
tom line: The longer you keep
your hands off the retirement
cookie jar, the less you’ll need
to have saved up by age 60.
Dramatically less.
For example, a couple with
$75,000 in joint household income who want to retire at 62
and have 75 percent of their
preretirement income would
need $975,000 in savings by
age 60. But if they’re willing to
keep working until age 67, T.
Rowe Price estimates they’d
need $675,000. Those five
extra years on the job cut the amount
needed at age 60 by almost one-third.
And if the couple don’t touch their
savings until 70, they need to set aside
an even lower amount—$525,000.
Hello, mission possible.
One assumption is critical: This
model assumes your portfolio will
earn 7 percent before you retire and
6 percent in retirement. That might
seem too optimistic. To build in a
margin of safety, you could assume a
5 percent preretirement return and
4 percent afterward. (By comparison, AARP’s financial-planning tool
assumes a 6 percent return preretirement, 3. 6 percent afterward.) If the
more cautious assumption proves accurate, you’d need to work one more
year than you anticipated. But even
that scenario is probably more affordable than you guessed. That’s because
the key ingredient in the recipe isn’t
the rate of return. It’s your intention
to keep working. “The investment
earnings on your contributions at this
later stage are less important,” says
Sass. “The value
$50,000 $75,000 $100,000
$600,000 $975,000 $1.4 million
$50,000 $75,000 $100,000
$450,000 $825,000 $1.1million
$50,000 $75,000 $100,000
$250,000 $525,000 $700,000
How Much You Need to Save
Your retirement will be more comfortable
if you work well into your 60s
And your total
household income is
You’ll need this much
in savings by age 60
And your total
household income is
You’ll need this much
in savings by age 60
And your total
household income is
You’ll need this much
in savings by age 60
SOURCE: T. Rowe Price. NO TES: T. Ro we Price assumes you will want
to replace 75 percent of your income and that you will not make any
withdrawals from your retirement account, or initiate your Social
Security payout, until you retire. The calculation also assumes a portfolio will earn 7 percent before retirement and 6 percent after.
If you plan to retire at age 62
If you plan to retire at age 65
If you plan to retire at age 70
(CONTINUED ON PAGE 60)
Crunch your numbers at
aarp.org/retirementcalculator.
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