Retirement Planning Silver Bullets, Part Deux

4609495055_4bf73981e6 In Part One of this two part blog series, we discussed the amazing leverage that can be gained, even in the case of an apparently floundering retirement scenario, when moving from a higher cost-of-living area to one that is lower.  But I fully recognize that while many will see this as an exciting retirement adventure, some would view it as a life-ending transition due to their attachment to their current geography, especially if they’re near family.  You do still have another option, and much as silver bullet #1 was summed up in one word—MOVE—so too is #2—WORK.

It’s not what you think.  If you’re one of the many who’ve dutifully labored for a lifetime, largely motivated by the vision of a day at some point in the future when you’d be able to dance your way out of your office, never to return, I’m not intending 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.  And this isn’t just advice coming from your financial planner, but also your doctor, as Anne Tergesen discovered in her 2005 BusinessWeek cover story entitled, “Live Long and Prosper. Seriously.”  She quotes Dr. Jochanan Stessman, head of the geriatric and rehabilitation department of Hadassah-Hebrew University Medical Center as saying, “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.  You’re working enough to keep your mind and body functioning at high levels with enough income to reduce your need to tap your nest egg.  Let’s look at this in the context of our hypothetical retiree from Bullets, Part One:

  • Age of couple:                  62
  • Assets
    • Home:                    $500,000
    • Nest Egg:               $800,000
  • Liabilities
    • Mortgage:              $200,000
  • Income need:                  $100,000
  • Income
    • Social Security:    $18,000
    • Nest Egg @ 4%:     $32,000
    • Total:                      $50,000

This couple is currently making $175,000 of income, but they’re burned out and want to retire ASAP.  Unfortunately, if they take their early Social Security Benefit at their current ages and rely on their nest egg to fund the remainder of their $100,000 income need, they’ll be pulling 10.3% out of their nest egg—an unsustainable withdrawal amount that could sink their retirement ship before it even sets sail.  Here’s the recommended course of action:

  1. At Age 62…
  • Begin to plan for the dream job, while adding $50,000 of their $75,000 of excess income to their nest egg
  • Pay down mortgage with $15,000/year of excess annual income. Ensure that nest egg is invested with capital preservation as the primary objective—assume 5% rate of return

2.  At age 66…

  •  Transition to dream job, accepting lower pay—$100,000—for full-time jobs they fully enjoy
  • Stop saving for retirement, but allow Social Security to continue to grow
  • Mortgage has been paid down to $94,093. Cease extra principal payments
  • Allow the nest egg—now $1,187,911—to grow, conservatively invested to earn 5% per year

3.  At age 70…

  •  Scale back to part-time work at dream job
  • Mortgage balance now $31,062
  • Take Social Security benefit = $30,927; income $50,000 (Total = $80,927)
  • Nest egg = $1,436,620; Addt’l income need = $19,073 or 1.3%

4.  At age 72…

  •  Mortgage paid off, reducing income need by $19,000/year
  • Social Security benefit = $32,176 (2% inflation/ year)
  • Nest egg = $1,583,873 (4% = $63,354)
  • Income need = $81,000
  • Current income (SS + 4% nest egg) = $95,530 ($14,530 surplus to be re-invested)

The purpose of retirement is not necessarily to NOT work, but to work because you want to, not because you have to.  For Baby Boomers fearful that their dreams for a fulfilling retirement have been dashed by the market and faulty assumptions, these two Retirement Planning Silver Bullets can be made to work… but it requires YOU to take this analysis from the hypothetical realm to reality.  This analysis has been largely focused on those either in retirement or headed in that direction within the next 10 years.  My next post will show younger generations how to apply these concepts to create a fulfillment plan that begins today!