Should I Stay or Should I Go? Easing into Retirement
Unforeseen events can sometimes force a person to retire, but for many people the decision to retire is a personal choice. And like any big decision, it can be fraught with uncertainty.
If you’re considering retirement in the not-too-distant future but not sure whether you’re prepared — financially, emotionally, or both — here are two approaches that might help you make a smoother, more confident transition.
Practice Makes Perfect?
One “practice retirement” scenario that has been promoted in recent years goes like this: The pre-retiree would stop saving for retirement around age 60 and continue working into his or her late 60s, allowing current savings to grow and Social Security benefits to accrue, while spending the income formerly dedicated to savings on the fun things he or she imagines in retirement. Getting a jump-start on the fun would be great, but this approach might work only for those fortunate few who have saved enough by the age of 60 to support a comfortable retirement. For many people, spending instead of saving in their early 60s could be disastrous.
A more realistic approach may be to try living on your projected retirement budget for six months or a year before you make the decision to retire. You might even set up two separate accounts: one for the expenses you anticipate in retirement and another for expenses that you may no longer have when you retire (for example, commuter expenses or a mortgage that you expect to pay off). Put only the amount of retirement income you expect to have into the “retirement account” and determine whether you can live comfortably on that income. If not, you may have to adjust your spending or work longer to increase your savings and Social Security benefits.
If you plan to move to a different part of the country when you retire, it may be difficult to simulate your retirement lifestyle while maintaining your current job. In that case, you might take an extended vacation and try living for a time in your planned retirement destination.
The federal government recently established a formal phased retirement program that allows eligible full-time federal employees to collect half their pensions while working half-time; at least 20% of their remaining work hours will be spent mentoring younger workers.
Only 11% of companies in the private sector offer some form of phased retirement, but there seems to be growing interest.1 If your company does not offer such a program, you might suggest an arrangement that could be beneficial for all concerned. Here are some ideas to keep in mind.
- Make sure you understand the effect of reduced hours on your benefits, such as health insurance and employer pension or retirement plan contributions.
- Because pensions are less common in private industry, you may have to supplement your lost income. If you claim Social Security before full retirement age and continue to work, not only will you receive a permanently reduced benefit but you’ll be subject to the “earnings test,” which may temporarily reduce your benefit until you reach full retirement age.
- A moderate phaseout program, such as working four days instead of five, might allow you to try living on 80% of your income without tapping other sources. This could be good practice for retirement.
- If you do phase out of your current job, make sure you don’t end up trying to do all of your former work in fewer hours!
Retirement should be a positive experience after a long working career. By taking a practice run or a phased approach, you may be more comfortable as you move into an exciting new stage of your life.