The whole concept of “retirement” is often perceived as the watershed moment of a career and the culmination of decades of education, hard work, and sacrifice. And no doubt, these perceptions have merit. As financial advisors, a good portion of our work with clients centers on retirement planning. From cash flow models to tax-efficient distribution strategies to estate planning, many of our discussions boil down to the Big Question: “When can we confidently turn off the alarm clock?”
Most often, clients are predisposed to an age at which they think they should retire. Usually, this age hovers somewhere around 65 depending on personalities and life-long habits of earning, saving, and spending.
However, this mindset is becoming an anachronism. There was a day when retirement meant a lifetime pension and a gift of a gold watch on the last day at the office. But as pensions and life-long employment with a single company have become increasingly rare, we counsel clients to rethink the concept of “retirement” as we have come to know it.
We should no longer think of retirement as a binary option with a hard stop: working one day, retired the next. Instead, we should consider a “phase-down” transition from 40-50+ hours per week to a gradually lower amount of time and effort as we age.
First, this approach has a substantial positive impact on the long-term sustainability of the cash flow plan. This income can be applied to non-negotiable costs, helping you pay for taxes, health care, housing, utilities, and grocery bills. Second, and maybe more importantly, staying engaged and working can benefit retirees’ mental and emotional well-being.
Reason #1: The Numbers
Figuring out potential retirement cash flow seems straightforward if we assume everything goes according to plan. But we never assume everything goes according to plan. Life is full of surprises. Markets are unpredictable and out of our control. What happens if returns are lower than anticipated? Or inflation is higher than expected? Or if a major health care issue creates additional expenses? Or a family member needs help? These possibilities lead to lower expected portfolio values in the later years of life. Flexibility is key. You need a plan that allows you to adapt to life's inevitable curveballs.
What to do? One idea is to consider extending the income-producing years by working part-time. This relieves the pressure on the portfolio, reducing the amounts withdrawn as well as the amount of time in the drawdown phase. The positive impact on cash flow plans can be startling. Even modest amounts of income resulting from a job with fewer hours and less strain can bolster the plan materially. This is a win-win when the work is enjoyable. It also brings higher confidence when paying for that first big retirement vacation, as an example.
Reason #2: State of Mind
While we often give counsel on retirement, we are not psychiatrists. However, we are steadfast believers in the power of purpose. It’s extremely important to wake up each day with a larger purpose in mind. We have guided thousands of clients into retirement over the decades and have often heard that retirement is great fun at first, but after a while, many discover there’s something missing. Almost always the missing piece is a purpose or progress toward something larger than self. Experience has taught us that staying engaged and involved is a great way to keep the mind “exercised” and healthy. Working part-time also allows some margin to get more involved in other family and community activities that can fill the void of purpose that may hit when fully retired from work.
This also depends on physical health, which can be a significant wildcard. Thankfully, as our labor force has increasingly evolved from manual labor toward intellectual work there is more opportunity to work even as our bodies slow down. In addition, technology advancements continue unabated and it’s easier than ever to stay connected, even from a condo in sunny Florida for ten hours a week!
We still advocate diligently saving, prudently investing, and planning strategically for a sudden retirement. As a best practice, we conservatively plan for the scenario in which clients cannot phase out of full-time work. Still, the final years of a career are well spent laying the groundwork for a gradual retirement. One that isn’t as disturbed by alarm clocks, deadlines, and market gyrations, and provides significant financial, mental, and emotional benefits.