When people think of retirement, they think it’s the finish line, and that they’ve made it. In some sense, this is true, but the reality is that retirement is really a starting point to a whole new season of life. And for many, this season can last twenty, thirty, or even forty years.
This is why it’s important to view retirement as a process, and not a destination. That’s because each stage of retirement has different income requirements that need to be considered, especially if you’re planning on pushing your retirement for the long haul.
Many people assume that their expenses will significantly decline in retirement. In fact, an old rule of thumb says you need 80% of your pre-retirement living expenses to get by. The rule was derived from the idea that if you’re already saving 20% of your income for retirement (therefore living on 80%), then that 80% should be sufficient for retirement living expenses as well.
The Problem: Underestimating Retirement Expenses
However, what many people don’t realize is that in retirement, every day is a Saturday. New retirees quickly realize that they’ve got much more time to play 18 holes at the country club or book that week-long get-away. And all these additional activities equal more money coming out of your bank account. In fact, we’re finding that many of our clients require closer to 100% of their pre-retirement income for retirement living.
So the key question boils down to this — how do you financially plan for a longer life, with more free time, with potentially higher expenses in retirement?
Two Solutions: Work a Few More Years or Transition to Part-Time
This might not be perfectly ideal, but two ways to plan for a longer retirement are by either extending your working career by a few extra years or slowly transitioning into full retirement with an intermediary period of part-time or contractual work.
In fact, there are several often-unrecognized benefits to employing either one of these two strategies.
- Saving Investment Account Distributions: Each year of retirement delayed equals a year saved of investment account distributions. This can be especially useful if the market happens to be down when you decide to delay retirement. See our blog post “Does Retirement Timing Matter” for more information on this issue.
- Delaying and/or Increasing Your Social Security Benefits: Your last few working years before retirement are often your highest earning years. Therefore, extending your career by a few extra years can sometimes increase your social security benefits, by replacing lower income earning years for higher ones. Remember, that your benefits are based on your top 35 earning years. So this is something to think about. Also, don’t forget that every month you work after your “retirement age” entitles you to a 2/3% increase in your overall social security benefits. That’s 8% guaranteed for the year. Watch our video about delaying benefits here.
- Extra Contributions into an Employer Sponsored Retirement Plan: Extending your working career can allow you to contribute additional years into an employer sponsored retirement plan. This can increase your tax savings and further build your nest egg. The amount you’re able to contribute to a 401(k) plan for 2023 is $22,500, plus a $7,500 catch-up contribution if you’re 50 or older. That is $30,000 total, which can really help you enjoy all those Saturdays in retirement.
- Psychological Benefits of Transitioning with Part-Time Work: Shifting from a busy working career to full retirement is an abrupt change, and one that sometimes comes with mixed feelings. Some retirees have trouble with the transition, as they thoroughly enjoyed their work or felt that their career gave them a sense of purpose. A good way to make this transition easier is by moving into part-time or contractual work for a few intermediary years. And the extra income earned during this time certainly won’t hurt either!
Everyone’s situation is different. And this is why it’s important to have a financial plan in place, and to review it as the plan and your surrounding circumstances change over time.
Please contact our office if you would like to discuss further how we can craft a retirement plan that’s unique to your personal circumstances, and one that accounts for the long run. We’d love to hear from you.
This commentary reflects the personal opinions, viewpoints and analyses of the Seaside Wealth Management, Inc. employees providing such comments, and should not be regarded as a description of advisory services provided by Seaside Wealth Management, Inc. or performance returns of any Seaside Wealth Management, Inc. client. The views reflected in the commentary are subject to change at any time without notice. Nothing in this commentary constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Seaside Wealth Management, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.