Dear Liz: I’m in my late 60s and plan to retire in about two years. I have a pension that will pay close to my current take-home income. I also have about $500,000 in annuities and IRAs. These plus Social Security make retirement look good. But right now finances are tight. Should I continue to put $1,300 a month into my retirement plan or use that money for expenses and travel now — while we’re still relatively young?
Answer: You appear to be in the fortunate position of being able to try a “practice retirement.”
The term was created by mutual fund company T. Rowe Price after it discovered that people who have saved substantial amounts for retirement by age 60 may not have to save much more to have a comfortable retirement. Just putting off the day when they take Social Security and tap their retirement funds may be enough. That’s because Social Security benefits grow about 7% to 8% a year, plus inflation adjustments, for each year you delay starting your checks. Not starting retirement plan distributions also allows your nest egg to grow, and the delay shortens the length of retirement you’ll need to cover.
T. Rowe Price found that people who have saved four to eight times their annual income by their early 60s may be able to crank back on their retirement contributions. Instead, they could use the money to “practice retirement” by taking some trips and doing some of the other things they had planned for golden years while continuing to work.
The company recommends practice retirees continue to contribute enough to employer retirement plans to get any available match (it’s free money, after all), while delaying the start of Social Security to age 70 if possible.
T. Rowe Price researchers assumed that its practice retirees would live only on their savings and Social Security. The fact that you have such a generous pension means you may not need as much saved as they recommend. In any case, if this idea appeals to you, run it past a fee-only financial planner who can review your situation and ensure the plan is viable for you.
The wild card is Social Security. It is almost a certainty that social security will be means tested and the middle class will be slowly nudged out of being able to collect it. Note that this can be done by the government a number of ways.
Social security is already means tested via how much of it is subject to income tax and by how much money one can earn.
I don’t think means testing is inevitable, especially not for the middle class. Means testing would be a pretty drastic change to the structure and purpose of Social Security, and won’t be necessary if we can ever get Congress to make more sensible reforms.
Liz, I’m impressed that you could use “Congress” and “sensible reforms” in the same sentence – I don’t see them reforming Social Security until it starts collapsing, and they themselves are required to live on it.
I’m 30 right now, and I’m not counting on SS for anything, not even lunch money. I’ve been saving in my 401(k) since I was eligible to do so, and so is my husband. He has stocks, we live within our means and plan to continue to do so, and any money the government decides we can collect when we’re 67, or 69, or 80-something, will be considered “found money”.
I agree. We plan for retirement as if social security doesn’t exist.