Why a ‘Practice’ Retirement Can Work

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BOSTON (TheStreet) -- A downbeat drumbeat these days is that many will no longer be able to retire when and how they planned.

Because of rising costs and a longer lifespan, making money last means staying on the job longer for many who might otherwise have retired well before 70.

T. Rowe Price is advising a unique -- and fairly counterintuitive -- strategy for plotting when to stop working. Keep working, they tell some clients, but parlay those paychecks immediately into the big plans and simple pleasures you always wanted for your later years.

Vacations? Golf? Sailing? Enjoy it all now, rather than postponing your dreams for years to come.

Christine Fahlund, a T. Rowe Price senior financial planner, describes it as a "practice retirement." She goes so far as to suggest one can even stop contributing to retirement plans once reaching 62 (or even as young as 60), so long as a nest egg remains untouched and living expenses and indulgences alike are funded from salary.

"If you are down and out and feel that the world is crashing around you, that you are never going to get to enjoy your 60s the way you counted on, there's hope," she says. "Start to think about starting to try out, and enjoy, your 'retirement' while you keep working."

"Here you are, age 60, you see that you haven't quite saved enough and envision having to stick around the work force and save, save, save so that, maybe, by 66 or 68 you get to have some fun, but even then it doesn't look likely," she adds. "We are saying to forget about that. Keep that nest egg that you have accumulated, even if it is not enough. Keep it invested in a well-diversified portfolio with 50% in equities, maybe even a little more, and let that ride while you start using some of your salary to have fun. Maybe you even stop contributions for a while to retirement accounts. The key here is that you keep working, but start enjoying yourself, be creative and try out new things."

A "practice retirement" isn't for everyone. Those with a dangerously underfunded nest egg need not apply. There are also some rules to follow:

Most importantly, your retirement accounts must remain untouched. Likewise for Social Security, which need to remain uncollected as long as possible to maximize benefits. They key is to preserve, and maximize, a diverse income stream for when you do finally retirel; being able to count on that steady check each month hedges against investment risk.

In running its numbers, T. Rowe Price makes the case that its unconventional approach can make financial sense. It offers a scenario of a 62-year-old (person or couple) who delays retirement and Social Security, with no additional wages invested.

Working until 65, his or her annual combined income from investments and Social Security would be 33% greater. If they worked until age 70, with no additional savings, the combined income could be as much as 86% greater than if retiring at 62. If 5% or 10% was contributed annually to investments, the increase would be 90% and 95% respectively. Because a 62-year-old wouldn't yet be eligible for Medicare, working until they qualify at age 65 also keeps them from having to tap into savings for insurance or out-of-pocket health care costs.

There are assumptions behind the estimates, among them having $500,000 in retirement savings by age 60 and savings earning 7% annually before retirement (6% after). It also, of course, assumes someone is physically capable of continuing to work, at least part time, and that employment is available.

"If you wait long enough, you actually end up with a more generous lifestyle than you would have had," Fahlund says.

Paying down debt ahead of a "for real" retirement is also important.

"Some of your salary for practicing, but some of it needs to be for debt reduction," Fahlund says. "Get the mortgage paid off. You really don't want to go into retirement relying on withdrawals from your nest egg and Social Security to cover payments that could be upward of $1,700 a month. It is going to take a huge chunk out of your withdrawals if you haven't paid that off. "

It is also advisable to plan for "big ticket" items, whether they are for fun or necessity.

"If you've always wanted a sailboat that would be large enough for the two of you to spend the winter on together, maybe now is the time to rent one and try it out," Fahlund says. "If it does turn out to be what you want, then try to figure out how you can get it paid for before you leave the work force."

Fahlund says the approach, which she describes as being in an early, "dipping a toe in the water" phase, has been met with enthusiasm and skepticism by various clients.

"What happens when one of us gets really sick at 63?" she says, recalling one concern. "We haven't been saving, we've been playing and spending that money instead. Aren't we really up a creek at that point?"

The answer is no, she says. Financially, Social Security benefits have continued to increase, as have the untouched savings (assuming average market returns).

Fahlund says this bad-news scenario, despite initial concerns, will probably yield few regrets.

She offers a possible scenario: "If we had known that one of us was going to be so ill at 63, we never would have taken those trips we would have been saving in a panic knowing what was coming. Instead, we took off the brakes, we did those trips, and thank God we did, because now with one of us so sick we couldn't do that later."

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