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Live for Today, Save for Tomorrow

What if working longer meant more fun, not less, and a bigger nest egg, too?

En español | As a senior financial planner, Christine Fahlund is not in the habit of telling people to stop saving for retirement. You wouldn't expect her employer, T. Rowe Price, to be wild about the idea, either. They are in the business of gathering investors' money into mutual funds and 401(k) plans. (Disclosure: Among those plans is the one for employees of AARP.) But in a new strategy that the company has been promoting this year, not only do Fahlund and T. Rowe Price suggest that you stop saving for retirement once you hit age 60; they encourage you to take the money you were previously putting into your 401(k) or other retirement account and — brace yourself — spend it. On fun stuff.

See also: Try AARP's Social Security benefits calculator.

Illustration of Live for today, save for tomorrow

More Americans are torn between retirement and working. — Illustration by Dan Page

"Your 60s should be a time when you start to enjoy yourself more," Fahlund says. "Take more trips. Spend time with the grandkids. Buy the boat or put in the pool you've been dreaming of."

And here's the kicker: If you follow their advice, you could end up with a higher income in retirement than you might have otherwise.

Is this a joke? Did Fahlund and company just snooze through the Great Recession? It's not, and they didn't. What T. Rowe Price calls "practice retirement" could, in fact, be a realistic option for you. But there's a big catch. Two catches, in fact. You have to have significant savings by the time you hit 60. And you have to commit to working well past your early 60s, because you're going to live off that income while your savings and your Social Security benefits sit untouched, gaining in value.

You may already be postponing your retirement: More than 60 percent of workers say they expect to retire at age 65 or later, according to the most recent survey by the Employee Benefit Research Institute, up from 45 percent in 1991. But few view the prospect with enthusiasm. Working longer is Plan B, a sign that something went wrong in your retirement schedule.

"Practice retirement" operates from a different set of assumptions. Steven Sass, director of the Financial Security Project at the Center for Retirement Research at Boston College, says most people think the point of working longer is to sacrifice and save. That's not it. "The payoff of working longer," says Sass, who coauthored Working Longer: The Solution to the Retirement Income Challenge, "is that you can preserve your retirement savings and delay taking Social Security." Medical researchers have long known that staying on the job pays benefits to the mind and body. By protecting your nest egg, enhancing your benefits, and limiting the number of years your stash needs to support you, working longer has a similar effect on your financial health.

And that creates some opportunities, including the one at the heart of Fahlund's suggestion: Put yourself in a position where you can afford to stop saving, or at least slow down, when you reach 60. Then: Live a little. "Get back to looking forward to your 60s as a time to be enjoyed," she says. "You are delaying retirement, but you don't have to delay enjoyment."

Still sound too good to be true? On the following pages, you'll find answers to your probable concerns:

Next: How much should you save so you can retire at 60? >>

Would you need to save a fortune to take "practice retirement" at age 60?

Obviously, you can't stop saving at age 60 if you never really started. You need a healthy sum of money in the bank. But the required amount may be less than you're probably thinking.

What you'll need depends on your current income, as well as the date when you expect to start tapping your savings and collecting Social Security. Bottom line: The longer you keep your hands off the retirement cookie jar, the less you'll need to have saved up by age 60. Dramatically less.

The longer you keep your hands off the retirement cookie jar, the less you'll need to have saved up by age 60.
For example, a couple with $75,000 in joint household income who want to retire at 62 and have 75 percent of their preretirement income would need $975,000 in savings by age 60. But if they're willing to keep working until age 67, T. Rowe Price estimates they'd need $675,000. Those five extra years on the job cut the amount needed at age 60 by almost one-third. And if the couple don't touch their savings until 70, they need to set aside an even lower amount — $525,000. Hello, mission possible.
One assumption is critical: This model assumes your portfolio will earn 7 percent before you retire and 6 percent in retirement. That might seem too optimistic. To build in a margin of safety, you could assume a 5 percent preretirement return and 4 percent afterward. (By comparison, AARP's financial-planning tool assumes a 6 percent return preretirement, 3.6 percent afterward.) If the more cautious assumption proves accurate, you'd need to work one more year than you anticipated. But even that scenario is probably more affordable than you guessed. That's because the key ingredient in the recipe isn't the rate of return. It's your intention to keep working. "The investment earnings on your contributions at this later stage are less important," says Sass. "The value is that you have a job that supports you and helps you preserve your retirement security by not beginning to draw down your savings. We're talking about a few extra years of working to secure your finances for decades."

Come on — decades? Working a few years more can't possibly make that much difference.

Most retirement experts say that it does. The Retirement Policy Center at the Urban Institute, for example, estimates that for every year you work past age 62, you increase your eventual retirement income by an average of 9 percent. At that rate, working eight years longer would double your retirement income. Here's why:

Working longer means your retirement savings need not stretch over so many years. You've probably already heard this longevity riff: A 65-year-old man today has an average life expectancy of 17 years; a woman, 20 years. So you figure, "Okay, if I make it to 65, I will die at 82 or 85."
But that's not necessarily correct. Your life expectancy isn't a calculation of when you will die; it's the age at which 50 percent of your age group will still be alive. So if you're 65 today, you've got even odds of making it into your mid-80s and beyond. It's even trickier if you're married. There's a better than 60 percent chance that one spouse of a 65-year-old couple today will still be alive at age 90. In other words, if you don't delay retirement — the average American man leaves the workforce at age 64; the average woman, at 62 — the chances are good that your nest egg will have to stretch for 30 years.

That can spread your savings thin. You can see the effect by plugging numbers into AARP's retirement calculator. Based on AARP's assumptions, a 60-year-old woman making $75,000 a year who retires at age 62 with a nest egg of $250,000 can sustain an annual income of about $31,000 through age 91. That same nest egg could support a healthier income of nearly $41,000 if she didn't touch her savings and delayed retiring until age 70.

You give your savings more time to grow. If you work until age 70, your nest egg will be bigger than at 62 because it has eight more years to incubate. As long as you have a respectable amount saved by 60, letting that money grow undisturbed matters more to your financial security than does your adding new cash each year. If you have $250,000 in your 401(k) at age 60, the 7 percent annual rate of return assumed by T. Rowe Price would add $17,500 to your account in the first year alone. That's probably more than you'd contribute to a 401(k) or IRA. Over 10 years that 7 percent rate would lift your savings from $250,000 up to $500,000 by the time you retire, even if you never saved another penny.

You can delay claiming your Social Security. Individuals can begin receiving benefits as early as age 62. But as the sidebar above shows, you'll lock in a higher payout if you hold off. "People's jaws drop when I tell them how much bigger their benefit will be if they wait," says Sass.

Michael Wilson, a financial planner in Orland, Indiana, notes that the financial crisis makes it crucial to consider delaying. "If your 401(k) tanked, you will be leaning on Social Security even more."

Finally, you reduce your out-of-pocket health care costs. Not many employers still offer retirement health coverage, so if you retire before 65 you may face stiff private insurance costs until Medicare kicks in. "The longer you can hold on to employer health benefits, the more you'll help preserve your retirement savings," says Richard Johnson of the Urban Institute's Retirement Policy Center.

Next: Are there risks to waiting later to save for retirement? >>

It's crazy not to save during your 60s. What if the market collapses? What if you get sick? What if you lose your job?

Working longer gives you the chance for some immediate gratification in your 60s, but it's not a free ticket to fiscal irresponsibility. Don't stop contributing to your 401(k) if your employer provides a match, for example; instead, dial back your contributions but keep saving enough to qualify for the maximum match. Otherwise you're essentially passing up free money. Don't drag debt into retirement. If you carry credit card balances, pay them off before you get into practice retirement's live-it-up mode. (Then keep them paid off.) Fahlund also recommends making big-ticket purchases while you have the income to cover them. And stay alert to market headwinds. If T. Rowe Price's 7 percent preretirement and 6 percent postretirement return assumptions look dicey after a few years, you may have to adjust by diverting more of your income into savings again, or trimming your expenses, or even delaying retirement by a year or more.

Can you really count on keeping your current job all the way to 70? Even if your employer is willing, your health may have other ideas. If you think that you're hale enough to go the distance, and secure in your position, practice retirement could be a possibility. "You have to take a look at your current job circumstances and ask yourself what is the likelihood you will be with that employer at age 67," Sass says. "If you do change jobs, you will probably lose money."

But don't forget that you can safely earn less than you once did. Since you are no longer diverting 10 or 15 percent of your salary into savings, you can bring home 10 or 15 percent less and still maintain the same quality of life. The aim is simply to resist tapping your savings and Social Security benefits until you are deep in your 60s.

Which brings us to the true benefit of working to a later age: options. One option is to have fun and spend more in a practice retirement. Another is to earn less money and take your foot off the career gas — or do work that's more meaningful to you. As long as you're still earning your living, the choice is yours. And with a Plan B like that, who really misses Plan A?

Next: 5 keys to working past 60. >>

Even before the Great Recession triggered massive layoffs, older workers often faced unique job disruption. About one-third of workers ages 51 through 55 in 1992 were involuntarily bounced from their jobs by the time they reached their mid to late 60s, according to a 2009 Urban Institute study. One-fourth lost their jobs because of a layoff or business closing; another 12 percent were forced to stop working because of illness.

But the upside to working through your 60s is so strong that it's worth fighting back to stay on the job, if you can. These principles should help.

Move the goalposts: If you're still harboring thoughts that retiring at 62 is "right," you risk mentally retiring at 60 or so. That makes you easier pickings if the boss decides to cut overhead. Plan to work until at least your late 60s and you will stay more engaged in your work.

Quitting is not an option: Don't think you can give full retirement a whirl at age 62 and then just go back to work if your new life doesn't shake out as expected. "Retirement is a bit of a black hole," says Working Longer coauthor Sass. "It's habit-forming."

Be a problem solver: "Look around and see what holes your employer needs to fill, then offer to step in," says Sass. "The more flexible you are, the more valuable you are."

If you have to switch jobs, plan on making less: Some good news: If you've been at your job for a long time, you're in a better position than colleagues with less tenure. "Older workers are better protected from losing a job, but once they lose that job, they have a much harder time [than younger workers] finding a new job," says Richard Johnson, an Urban Institute retirement-policy expert. And the next job will likely be at a lower salary, so don't hold out for a fatter paycheck. Remember, though, that the main goal is to earn enough to cover your living costs.

Take care of yourself: A healthier you increases the odds you'll be able to keep working. It also makes it likelier you'll enjoy your 60s — and beyond.

You might also like: 10 Great Small Cities for Retirement.

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