Don’t jump off the retirement cliff; practice instead

The Bakersfield Californian
May 31, 2013

A client, who I will call Brad, is approaching retirement as if it were a steep cliff. Brad has set a retirement date and is preparing to just jump off the cliff.

Brad is a saver. His retirement nest egg is substantial, although he is not rich. He and his working wife both qualify for the maximum Social Security amount (about $2,500 each) if they wait until 66 to file for benefits.

But Brad frets. He is not sure they have saved enough to maintain their lifestyle after retirement. And he worries he will be bored because he has few hobbies and no clue how he will fill his days.

My advice: Back away from the cliff. Practice before retiring.

“Practice retirement” is a concept promoted by financial giant T. Rowe Price and AARP. Basically, it encourages retirement-age boomers to keep working, stop contributing to retirement savings plans and “taste” retirement. A common example used to explain “practice retirement” is:

A couple, each age 60, with a combined salary of $100,000 and a $500,000 nest egg. They have been directing 15 percent of their annual salaries into their retirement plans. If they retire at 62 and start collecting Social Security, they would have an annual retirement income of $51,974 and about $526,000 in retirement savings when they reach age 70.

If they keep working to age 70 and continue to fund their retirement plans at the 15 percent level, they would have annual incomes of $96,240 and savings of $917,951.

But under the “practice retirement” concept, the couple would keep working until 70, but stop contributing to their retirement plans. They would use the “freed up” $15,000 to “taste” retirement — take trips, buy an RV, make home improvements, or pay off debt.

This version of “practice retirement” works only if you have saved five to eight times your annual salary. Otherwise, people should continue to contribute to their retirement plans.

My client Brad and his wife are too conservative to “squander” their money on a boat or fancy cruise.

Instead, I developed a limited “practice retirement” plan for them.

Delay Social Security: Do not collect Social Security benefits until age 70. Benefits increase 7 percent to 8 percent for every year you delay taking them, up to age 70.

Keep working: Continue receiving your present salary and continue contributing to your retirement plans. Battered by the Great Recession of 2008 and the housing bubble bust, few boomers have saved enough for retirement.

Assess assets: Determine your income if you retire at various ages. Assess your debts and how you now spend money. Roll back your spending to your anticipated retirement income. Can you make ends meet? How’s your quality of life?

Plan activities: Use vacation time to test your “dream” retirement. Spend a few weeks each year living near your grandchildren, or in a retirement community, or traveling in a rented RV. Are you living a dream, or a nightmare? Take classes, develop hobbies, explore new careers.

Retirement should not be a jump off a financial and emotional cliff. With planning, it can be a gentle, enjoyable journey.