The New Paradigm of Retirement Planning

Do worries about having enough money to cover retirement keep you awake at night? Do you feel unhappy about the prospect of having to work many more years in a job you don’t love? Relief may be at hand if you consider the new retirement paradigm that offers a reasonable trade-off between continuing work and beginning to enjoy retirement activities while you still work.

The new paradigm goes like this example:

Let’s say your financial planner explains you can’t afford to retire now – you need to work another 4 years. Is the advice more palatable if you reduce retirement savings and use it now to pay for the retirement activities you look forward to?

Donald and Jane earn 150K/year. Both are 63. Their immediate retirement dream is to criss-cross the US by trailer to visit all the US National Parks. Their financial planner tells them they need to work to age 67 so they retire on at least 75% of their preretirement income (=113K/year) . If they retire now, social security + withdrawals from their retirement income only provide 55% of their current 150K income. That’s not enough to sustain retirement into their 90s.

Donald and Jane aren’t very enthusiastic about working another 4 years, but their financial planner creates a new transitional retirement strategy:

3 Options

1) Postpone taking social security until Donald and Jane are 70. Social security benefits increase by approximately 8% per year from ages 66 – 70. It pays to take social security at age 70 once someone lives past 78/79 years of age. Donald and Jane are in good health; their financial planner is assuming they will live into their 90s. They also have enough money to cover living expenses from ages 67-70.

2) Continue to save for retirement, but significantly reduce savings. Instead of saving 33K/year in their 401(k) plans (16.5K per person, before company match), Donald and Jane scale back their contribution to 10K each. They still benefit from a company match, but they don’t save the maximum amount they could each year in their 401(k).

3) Donald and Jane use the 13K/year amount they would have saved in their 401(k) plans (33K minus 20K = 13K ) and spend it on themselves each year, until they retire at age 67. They use this money to rent a trailer and visit 2 national parks each year during their vacations.

In sum, Donald and Jane agree to work an additional 4 years, but they begin to enjoy some of their retirement activities now. In this example, their financial planner projects they will average 82% of their preretirement income throughout their retirement – instead of the measly 55% they would have had if they retired at age 63.

This nuanced approach toward retirement planning fits better with the new realities of work/retirement in the US – often a prolonged, transitional process instead of an abrupt halt – from one day to the next – of work and retirement.

It’s the job of a good financial planner to balance the need for additional assets and savings with the need for “retirement activities” some people can enjoy before they officially retire. However, I don’t recommend you contemplate making Donald and Jane decisions on your own since outliving your assets remains one of the biggest risk the Boomer generation now faces. Careful planning is involved to achieve this type of transitional retirement approach. See your financial planner for more information.

About the author

Eve L. Kaplan, CFP®

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