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P F

Delaying Retirement But Not Your Retirement Dreams

Many investors today who had planned to retire early at 62 when they became eligible for Social Security benets—albeit at a reduced rate compared with normal retirement age—are discovering that those benets, combined with their retirement savings, cannot support the lifestyle they expected or provide the nancial cushion in retirement they desire.

Often, they are disappointed to realize they may have to continue working and saving for several more years to catch up. This strategy leaves preretirees in transition with a choice: retire early with insufcient savings and income in retirement or delay their retirement dreams until after they retire.

For some preretirees there may be another, more desirable option. An analysis by T. Rowe Price demonstrates that, even if those in their early 60s decide to keep

working but discontinue making contributions to their retirement plans—spending that money instead—they can start fullling some of their retirement dreams sooner and still be in a stronger

  • nancial position down the road.

“We advocate a new transitional strategy,” says Christine Fahlund, a senior nancial planner for T. Rowe Price. “While this approach involves working longer, it can provide more discretionary income during these transition years to start seriously pursuing your retirement aspirations well before you thought you could.

“And by continuing to work and delay receiving Social Security benets, you are positioning yourself to have potentially higher payments—adjusted annually for ination—for the rest of your life. This strategy can be much more positive for those in transition.”

A Case Study

To illustrate how this new strategy could work, let’s consider the hypothetical couple John and Mary Smith. They are each 60 years old, have a combined income of $100,000, and have $500,000 in retirement savings. They have been saving 15% of their income ($15,000) each year in their 401(k) plans and want to retire in two years.

Here are some possible scenarios (as reected in the chart below, assuming a 7% preretirement return on investments and a 6% post- retirement return).

  • Retire at 62 as planned: If the

Smiths begin Social Security benets at 62, they would receive $30,700 a year (plus assumed annual cost of living adjustments of about 2.8%). Additionally, they could expect appropriate annual withdrawals from their retirement savings of $21,100 (plus annual ination

New Strategies For the Transition Years

Annual Income and Savings First Year of Full Retirement for Both Spouses

Strategies Both Spouses Fully Retire at Age 62 Both Spouses Fully Retire at Age 66 Both Spouses Fully Retire at Age 70

ncome Age 62–69

Cumulative I*

$413,100 $671,300 $800,000

Both Spouses Work Part Time From Age 62 to Age 70









Total Annual






















Savings Balance at Retirement

$571,400 $665,400 $775,000


*Sources of income include salary and/or Social Security plus savings withdrawals, in current dollars at age 60.

The table shows how much annual pretax income and savings at retirement this couple would have under various retirement scenarios. Each scenario assumes: the couple had $500,000 in retirement savings at age 60 and $100,000 in annual earnings ($60,000 plus $40,000) with 3% yearly inflation adjustments; 15% of earnings are contributed to a retirement plan annually until age 62 and no contributions thereafter; no Social Security benefits or savings withdrawals are drawn by either spouse until his/her retirement; savings earn 7% annu- ally before retirement and 6% annually after retirement; amounts represent current dollars at age 60, assuming a 3% discount rate; Social Security benefits rise 2.8% annually after initiation; savings are withdrawn at a rate of 3.7% for age 62, rising by 0.1% for each year retire- ment is delayed; the initial withdrawal increases yearly by 3% inflation. Social Security benefits are from the Social Security Administration website’s Quick Calculator (assuming 0% relative growth factor).

Sources: T. Rowe Price Associates and ssa.gov.

16 www.troweprice.com

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