Retirement Silver Bullet #2: Work
In the first of this two-part series, we discussed the amazing amount of leverage you can gain — even in the case of an apparently floundering retirement scenario — by moving from a higher cost-of-living area to a lower one. I fully recognize, however, that while many would see this as an exciting retirement adventure, others would view it as a life-ending transition. This second case usually occurs because of an attachment to your current geography, especially if you’re near family.
You do still have another option, and much as the first retirement silver bullet was summed up in one word — MOVE — so too is the second: WORK.
It’s not what you think. If you’re one of the many who’ve dutifully labored for a lifetime — motivated by the vision of a future day when you’d be able to dance your way out of the office, never to return — it’s not my intention to obliterate that daydream. In fact, the only way this second silver bullet will work is if you’re able to find, or create, a vocation that gives you as much or more joy than being fully retired.
This isn’t just advice coming from your financial planner. It also comes from your doctor, as Anne Tergesen discovered in her 2005 Businessweek cover story, “Live Long and Prosper. Seriously.” She quotes Dr. Jochanan Stessman, head of the geriatric and rehabilitation department of Hadassah-Hebrew University Medical Center, who says: “There’s a strong argument for continuing to work throughout life.”
This doesn’t mean you have to work full-time, nor does it mean that you should be doing work that drains you. This is your license to create your dream job and begin to plan a phase of life we’ll call pseudo-retirement. In this phase, you work enough to keep your mind and body functioning at a high level and for enough income to reduce the need to tap your nest egg.
Let’s look at this in the context of the hypothetical retiree couple from our first retirement silver bullet scenario:
- Age of couple: 62
- Home: $500,000
- Nest egg: $800,000
- Mortgage: $200,000
- Annual income need: $100,000
- Actual income
- Social Security: $18,000
- Nest egg at 4 percent: $32,000
- Total: $50,000
This couple is currently working and making $175,000 each year, but they’re burned out and want to retire as soon as possible. Unfortunately, if they take the early Social Security benefit at their current ages and rely on their nest egg to fund the remaining $50,000 of their $100,000 income need, they’ll be pulling out 10.3 percent annually. That’s an unsustainable withdrawal amount that could sink their retirement ship before it even sets sail. Here’s the recommended alternative course of action:
- At Age 62:
- Begin to plan for their dream jobs while adding $50,000 of the $75,000 they have in excess income to their nest egg.
- Pay down their mortgage with $15,000 each year of their excess annual income. This ensures that their nest egg is invested with capital preservation as the primary objective. Assume a 5 percent rate of return.
2. At age 66:
- Transition to their dream jobs, accepting lower pay — $100,000 each year — for full-time jobs they fully enjoy.
- Stop saving for retirement, but allow Social Security to continue to grow.
- Their mortgage has been paid down to $94,093, and they cease extra principal payments.
- They allow their nest egg — now $1,187,911 — to grow, still conservatively invested to earn 5 percent per year.
3. At age 70:
- They scale back to part-time work at their dream jobs.
- Their mortgage balance is now $31,062.
- They take their Social Security benefit, now equaling $30,927. That plus $50,000 in income from working their dream jobs gives them a total of $80,927.
- Their nest egg is now $1,436,620; their additional income need from it is $19,073, or 1.3 percent.
4. At age 72:
- The mortgage is paid off, reducing their income need by $19,000 each year.
- Their Social Security benefit is $32,176 after adjustment for 2 percent inflation each year.
- Their nest egg is now $1,583,873, which at a 4 percent withdrawal rate gives them $63,354 in income annually.
- Their new income need is now only $81,000.
- Current income (Social Security + 4 percent nest egg) = $95,530 (that’s a $14,530 surplus to be re-invested).
The purpose of retirement isn’t necessarily to NOT work. It’s to work because you want to, not because you have to. For baby boomers fearful that their dreams of a fulfilling retirement have been dashed by the market and faulty assumptions, my two retirement planning silver bullets can be made to work. But they require YOU to take this financial analysis from the hypothetical into reality. The scenarios presented here have focused largely on those either in retirement or headed in that direction within the next 10 years, but younger generations can also apply these concepts to create a plan for a fulfilling retirement that begins today.
If you missed silver bullet #1–MOVE–you can find it here.
This commentary originally appeared July 11 on Forbes.com
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