Retirement Plan: Delay the Date But Not the Dream

(MoneyWatch)  Retirement isn't just a financial consideration. It's also about how you'll spend your time. So why not test the water before you actually quit work?

The idea of a "phased retirement" has been around for a while. That's where you and then your spouse scale back hours at the office or find a part-time job, gradually adjusting to the lower income while exploring what you'll do with your increasing amount of free time. The mutual fund company T. Rowe Price puts a slightly different spin on the strategy, calling it "practice retirement." The idea is to stay at work longer and probably full-time, but stop saving and use the additional cash to live it up a little.

People in their 60s typically confront the retirement years with a choice: quit now with less money than they had hoped, or work and save longer until they have the resources they feel they need. T. Rowe Price found that while working longer must be part of the solution, saving more need not. By working longer and ramping up spending, not saving, you can begin to enjoy your later years right away -- to practice retirement -- with little impact on how much longer you'll need to stay on the job.

Consider a 60-year-old couple with combined annual income of $100,000 and $500,000 in a 401(k) plan. This couple has been saving 15% of income each year and wants to retire at age 62. Here are three scenarios, based on pre-retirement investment returns of 7% and post-retirement investment returns of 6%:

• Retire at 62 If the couple retires now they will receive $30,700 in annual Social Security benefits to go along with a recommended annual withdrawal from their 401(k) plan of $21,000, for total income of $51,700. The figures would rise each year in line with inflation but will never get to the couple's target income: 75% of final working-year pay (initially, $75,000). Factoring in their savings rate, likely investment returns and Social Security benefits, their nest egg would be $535,200 at age 70.
• Retire at 66 If the couple works full-time to this age they will be in far better shape, even if they stop saving and use the 15% a year they would have socked away to "practice retirement." At this point their income from recommended withdrawals from their savings accounts and from Social Security benefits would be $67,900 -- much closer to the $75,000 target -- and because they did not spend down their nest egg for four additional years it would stand at $676,400.
• Retire at 70 If the couple works full-time to this age, and stops saving at 62, their income from Social Security benefits and a reasonable annual withdrawal from savings would be a robust $89,000, and their nest egg would be nearly $800,000.

One reason this "practice retirement" strategy works is that by not drawing down the balance for a few more years the couple's money can keep growing. But even more important is that each year the couple works and delays taking Social Security benefits those benefits increase by about 8%, and because the increases are based on government formulas -- not on investment returns -- you have some certainty that the higher levels will be there no matter what happens in the market.

Even when it comes to retirement, it seems, practice makes perfect.

Photo courtesy Flickr user perspective
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