Published in March 2015. Kiplinger’s Personal Finance. (original article may be viewed here).
How to Plan for Retirement
Once, retirement meant hitting the golf course or sitting by the pool. The new retirement? Whatever you want it to be.
Look up retire in the dictionary and here’s what you’ll find: “To retreat from action or danger. To withdraw for privacy, to recede. To conclude a career.”
Retreat, recede, conclude are not words in Priscilla Jackman’s vocabulary. In 2008, she retired from a 33-year teaching career in the Steel Valley school district, outside Pittsburgh, and immediately returned to the same district as a consultant on literacy programs. Four years later, she “retired” from that gig and took a five- to seven-hour-a-week job mentoring student teachers at a nearby university. Now 61, Jackman enjoys mentoring but, she says, “I don’t see myself doing it until I’m 70.” She definitely sees herself doing “something else” — maybe tutoring elementary school kids as a volunteer.
The beauty of Jackman’s setup is that with a shorter work schedule, she has plenty of time to take guitar and violin lessons, act as social director for her extended family, sing in a volunteer hospital program and explore back roads with her husband, Tom, who is also retired. “We set the GPS and see where it takes us,” she says. “We love finding great little towns and great diners.” Rather than define her post-career life as a slow fade into the sunset, she says, “I’m in awe of what it’s possible to do as a retiree.”
In fact, demographic changes have turned the standard definition of retirement upside down. Life expectancy has increased steadily over the decades. Now, a man who reaches 65 can expect to live another 18 years; a 65-year-old woman can expect to live 20 years. Plus, people work longer than in past decades, thanks to better health and a higher level of education, which generally leads to more gratifying, less-strenuous work.
With more time and opportunities, many retirees are phasing in and out of work, taking part-time, seasonal or consulting jobs or acting as entrepreneurs. Some post-66-ers work because they need the money, but the majority are taking advantage of the resources they have (including Social Security, savings and maybe a pension) to seek work that is more enjoyable and less stressful than their career was, says Nicole Maestas, a senior economist at the Rand Corp. who has studied older workers. For many, “retirement connotes a broader set of options,” she says. “It’s a new phase of life.” (See 6 Reasons to Work Past Retirement Age.)
Explore the possibilities
Having more time to work and play may sound delightful, but figuring out how to do it over 20 or 30 years is no last-minute exercise. Experiment by pursuing hobbies, volunteering at places where you might want to work, and thinking carefully about whether you want to downsize or move to another city altogether, says Larry Rosenthal, a certified financial planner in Manassas, Va. “People retire to a place and then think, The grandkids are back where we were, and they want to move back. Or they discover that Florida gets really hot in the summer.”
One way to get a sense of what you want to do a few years hence is through a “practice retirement.” That idea, proposed by investment firm T. Rowe Price, has you continue to work at your career job but back off on saving for retirement — say, by contributing only enough to your 401(k) to get the company match. Then you can use the money you’ve freed up (plus vacation time) to try out your ideas, such as traveling cross-country or turning your hobby into a side business.
Cutting back on contributions to savings in your early sixties may sound like heresy, but the key is staying on the job and waiting to take Social Security until full retirement age (66 until 2021) or later. For each year you delay taking Social Security after 66 until age 70, you get an 8% bump in benefits. And while you’re still pulling in a paycheck, you can let your retirement savings grow, even if you’re not contributing to your accounts. “It’s a way to stay in the workforce and have a little fun while doing it,” says Judith Ward, a senior financial planner at T. Rowe Price.
Plan to work longer
In most professions, employers can no longer require you to retire at a certain age, but keeping yourself relevant in your current career or attractive to your next employer is on you, says Catherine Collinson, president of the Transamerica Center for Retirement Studies. That includes keeping your skills up-to-date, maintaining and expanding your network, staying on top of the job market, and taking classes or going to school for another degree.
Peter Sefton of Alexandria, Va., accepted the challenge and took it to a whole new level. After working for the U.S. Census Bureau for 24 years, he enrolled in a master’s degree program at the University of Virginia, leaving his wife, Linda, to hold down the fort in Alexandria for the next two years. “My retirement party was on Friday. I packed up my desk, and on Monday morning, I was in Charlottesville with the 25-year-olds,” says Sefton, who was then 59. A federal pension provided financial underpinning. In addition, he was awarded a fellowship to help pay for his degree in architectural history, an extension of his longtime interest in historic preservation. Now 63, he works about 25 hours a week as a consultant on building preservation (and is happily back in Alexandria with his wife).
Look into phasing out. Not interested in reinventing yourself? Consider staying at the job you have but changing from full-time to part-time work or to a less demanding role. Some employers offer formal phased-retirement programs that let you cut your hours or work only part of the year, or trade managerial responsibilities for a mentoring role. The federal government recently launched a program in which eligible employees can work half-time, training less-experienced employees.
If your employer has no formal program, scope out the feasibility of making your own arrangement. Start by checking with the human resources department. “Have a clear vision of what you want and be very specific,” says Collinson. Some companies only want full-time employees, she says; proposing anything else is a nonstarter. “There’s homework to be done before you even have a conversation with your boss,” she says.
While you’re talking to HR, find out how changing from full-time to part-time status would affect your eligibility for employee benefits. Only half of the employers who offer 401(k)s allow part-time employees to participate in the plan, according to a recent survey by the Transamerica Center. And a report by the Employee Benefit Research Institute shows that fewer than half of large employers (those with 200 or more employees) and one-third of smaller employers offer health coverage to part-time workers.
If you continue to work past 65, you’ll have to coordinate your health coverage with Medicare. At 65, you qualify for Medicare Part A, which covers hospital services and is free. At that point, you can also enroll in Medicare Part B (for doctor visits) and buy Medicare supplemental coverage and Part D (for prescription drugs), or enroll in a Medicare Advantage plan, which combines the two and offers other benefits.
If your company has 20 or more employees, employer-based coverage pays first, and you can stay on it if you work enough hours to be eligible. In that case, just sign up for Part A; when you do retire, you can sign up for Part B and the other coverage without penalty or having to wait for open enrollment. If your company has fewer than 20 employees, Medicare becomes your primary insurance, even if your employer offers its own coverage — so if you don’t sign up for Medicare, you may not be covered at all. Be sure to talk to your employer about what your options are.
Line up your finances
Whether you figure on working well past retirement age or kicking back on day one, anticipate how you’ll handle ongoing expenses plus potential curveballs, such as a downturn in the stock market or a health problem that could force you to retire early. Mark Thorndyke, a Merrill Lynch wealth management adviser in Chicago, works with clients who are three to five years out to put together a financial plan and plug in what-if scenarios. “That helps clients get a good idea of what’s achievable and what kind of planning they need to do now.”
Start with a budget for necessary expenses, including food, housing and health care, as well as nice-to-haves, such as travel and trips to see the grandkids. Match the need-to-haves with guaranteed income, such as Social Security, pensions and maybe an annuity, and plan to tap your retirement portfolio to pay for the wants.
Many retirement planners recommend that you withdraw no more than 4% of total assets the first year and the same amount, adjusted for inflation, every year after that. But working longer lets you leave more of your savings intact and makes it easier to defer Social Security (and collect a bigger benefit). And because your earning power offsets risk, you can afford to take more risk in how you invest, says Matt Sadowsky, director of retirement at TD Ameritrade. “Instead of a traditional balanced portfolio in retirement — say, 50% stocks and 50% bonds — you might allocate 60% or more of your portfolio to stocks.”
Not everyone delays taking Social Security. In fact, most people take it before 66. Be aware that your benefit is reduced based on the number of months you take it before full retirement age. Start taking it as soon as you turn 62 and it gets dinged by 25%. If you keep working after claiming Social Security but before you reach full retirement age, you’ll also be subject to an earnings test, in which $1 is deducted from your benefit for every $2 you earn above the annual limit — $15,720 in 2015. (In the year you reach full retirement age, $1 is deducted in benefits for every $3 you earn above a higher limit, which is $41,880 in 2015.)
Another option: Claim Social Security at 66 but keep working and use your benefit checks to, say, travel or pay for college for the grandkids. “All of a sudden you get a couple of thousand dollars a month coming in — there’s a lot you can do with that,” says Rosenthal. (For more ways to make the most of your benefits, see Best Strategies to Boost Social Security Benefits.)
Don’t forget about taxes. Up to 85% of your Social Security benefits may be subject to tax. That becomes almost a certainty if you’re pulling in a paycheck while collecting benefits. Working can also put you in a higher tax bracket or keep you there, meaning you’ll owe more on distributions from your pretax retirement accounts. From a tax perspective, you might be better off if you delay claiming Social Security until 70 and hold off on tapping pretax accounts until you turn 70 1/2, when you are required to take minimum distributions.
Or keep your options open by funneling money into a Roth IRA. As long as you’re older than 59 1/2 and have had the account for at least five years, distributions, including earnings, are tax-free (you can withdraw contributions tax-free at any time). If most of your money is in a tax-deferred account, consider paying the necessary tax bill to convert a chunk of that money each year into a Roth. If you convert $10,000 a year from age 60 to 70, at 70 you will have $100,000 plus earnings sitting in a tax-free account. By about that time, says Rosenthal, “you’re on Social Security and taking required minimum distributions, and you can take tax-free dollars to minimize the taxes.”
Retire, rinse, repeat
Almost 20 years ago, Gregory Contro, now 52, had a frenetic, lucrative career as the head of a futures brokerage group on the Chicago Mercantile Exchange. By age 37, he was ready to move on. An avid tennis player, he retired from his first career and became a tennis coach for young, high-level players in the Chicago area, a job he had already been doing on the side. “I had achieved a lot of my goals on the exchange and was going to try this new challenge.”
Most people don’t have the resources to retire at 52, much less 37. In making the transition, Contro had the luxury of knowing he could afford to hang up his career altogether. “I was able to save and got familiar with the concept of wealth management early. When I left the Merc, I knew I could pretty much do what I wanted if I didn’t mess it up.” He managed his assets conservatively, working with financial adviser Gayle Ronan, who has since retired. “She made me understand what I needed to live on comfortably, taking into account shocks that investments go through and shocks in your personal life that you have to account for,” he says. “You have to build in some safety nets” — including, in his case, umbrella insurance because he works with kids in a physically demanding setting.
Contro could still retire if he chose to. “I work because I like to work,” he says. But, like others his age, he has started preparing for a next act. Inspired by his relationship with companies including Fila sportswear and Wilson Racquet Sports, Contro is working toward a master’s degree at Northwestern University in sports marketing, a career he hopes will last him until he fully retires. “Going back to school has been incredibly exhilarating for me mentally,” says Contro, who is by far the oldest in his class.
Contro’s experience reflects the growing awareness that productivity doesn’t stop when a career ends. “You think, I want to make enough money to get out of the game, and then you realize, I’m just too young to retire — there are a lot of challenges out there,” says Contro. “You become thirsty for something different.”
So when does he actually plan to retire? He’s not sure. “The one thing I do know is, I don’t want to sit still.”
Get on track with a coach
One way to find your path is to consult a retirement coach. Such coaches, whose services run $75 to $300 an hour or more, can help you identify your skills and interests, pinpoint what activities you find most rewarding, and establish how you see yourself outside the workforce.
“If you’re retiring in three months and you have taken all your identity from your job, we have work to do,” says Joanne Waldman, a retirement coach in St. Louis and director of training for Retirement Options, which certifies retirement coaches. Most people want to stay engaged, “but not necessarily in what they’re doing,” she says. “It’s exciting to find out what that new thing is.”
- By Jane Bennett Clark for Kiplinger’s Personal Finance.