Can working a few years longer really make a big financial difference for retirees?
Perhaps more than you might think.
A couple recently asked me to help them evaluate their retirement options. I’ve changed the names and numbers to protect the innocent (or insolvent).
Bob and his wife Vicky are 60. Their house is paid for, they happily drive older cars, and they live frugally—spending only about $6,000 per month (after taxes). Bob is in his peak earning years—and also the twilight—of his career. He’s not quite ready to hang it up, but he’d like to have that option sooner than later. In fact, for the last few years, he’s been eyeballing the possibility of retiring at age 62.
Vicky just finished a 35-year teaching career. She’ll soon start collecting a pension from the state in the neighborhood of $3,600 a month. If Bob lived out his daydream and retired in two years at age 62, he could expect about $1,600 a month from Social Security. That income combined with Vicky’s would leave a monthly budget shortfall of around $800. But with $500K in investments and another hundred grand in the bank, Bob feels pretty good about things.
As a financial planner, one of my tasks when helping couples like Bob and Vicky is to simulate various scenarios in which circumstances go well, and in which they go…not so well. There are always a lot of “what ifs” to consider: rising and falling markets, unexpected medical bills, spending too much too quickly, the rising cost of living, and tax increases…just to name a few.
In the end, we used a “Goldilocks” scenario (not too hot, not too cold…just right) to lay out Bob’s best options.
This space doesn’t allow me to go in depth about how we built each scenario, but here’s what we found.
- Immediate retirement for Bob was out of the question.
Bob and Vicky knew that going in, but running the numbers verified what they knew instinctively.
- Semi-retirement was a viable option.
Suppose Bob worked full time to age 62, then moved into a consultant’s role, only working about half time. Yes, his income would be reduced significantly (and as a self-employed consultant, he’d have to pay additional self-employment tax). Still, he’d have less stress, more free time, and his extra income would allow the couple’s assets to grow, giving them more cushion in retirement.
- Working to age 70 provided the greatest margin.
If the last decade has taught us anything, it’s that the things we once considered “sure things” can quickly become “sour things.” The best response to this reality isn’t to panic or bury your head, but to create margin (for error).
Case in point: Bob learned that if he continued working full time, it would greatly affect his Social Security benefits:
- Retiring at 62 – $1,600/month
- Retiring at 65 – $2,000/month (a 25% increase)
- Retiring at 67.5 – $2,600/month (a 63% increase)
- Retiring at 70 – $3,100/month (a 94% increase!)
Again, the future of Social Security is a bit murky. And no one financial answer is right for everyone. In light of that, you have to plan with a hint of pessimism and live with a heart of optimism.
But this much is undeniable: The extra effort you put in at the tail end of your career just might make all the difference.
One last thing….While we’re discussing retirement, you may be wondering about your best options for turning your retirement “nest egg” into regular retirement income. If so, I have a free gift for you. It’s a 5-minute inventory called the RISA (which stands for Retirement Income Strategy Assessment). The RISA quiz can get you started on figuring out the retirement income strategy that’s best for you. Email me (bmoore@argentadvisors.com) to get your link.
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