If you are near retirement, you will hear this advice very often: Stay in your job for a few more years. This is good advice, but it isn't very palatable or always possible. Some of us may have to leave a career due to family reasons, a health issue, or a company layoff. If your retirement fund is a little low, then it's wise to keep working. However, there is an alternative to delaying retirement: Phase into your retirement and delay withdrawals instead.
Phase into retirement. Phasing into retirement will let you stay active in your most healthy years of retirement. Most of us still want to work and contribute to society when we are 55 or 60 years old, but may be bored with our careers or want to spend more time with family. One way to phase into retirement is to transition to part time. Another is to change careers to a more interesting and fulfilling job. These options will most likely reduce your income, but they will enable you to delay withdrawals from your retirement fund. Many of us are uninspired by our jobs after working for 30 years, and perhaps the change will enable us to delay full retirement.
Delay withdrawals. Delaying withdrawals has a big impact because the extra time will let your investments continue to grow, and you will spend less time in retirement. For example, let's say you expect to live until age 80. Robert retires at 60 and he needs to spread his retirement fund withdrawals over 20 years. Jane also leaves her full-time career at 60, but delays her withdrawals by 5 years. Jane will have 15 years of full retirement to cover. Let's assume they both have $500,000 in their retirement funds at age 60, earn a 6 percent annual return on their investments, and encounter an inflation rate of 3 percent.
|Robert age 60||Jane age 60|
|Begin withdrawal age||60||65|
|Retirement fund||$500,000||$669,100 (5 additional years at 6%)|
|Years in retirement||20||15|
|2012 withdrawal||$32,393||$0 (delay withdrawal for 5 years)|
By delaying withdrawals, Jane's retirement fund will have a longer period of time to grow. We estimated the annual growth rate to be 6 percent, but it will be up and down in real life. After 5 years, Jane's retirement fund will grow to $669,100. In addition, her withdrawal period will shrink to 15 years instead of 20. This enables Jane to have 44 percent bigger annual withdrawals in her retirement. Jane has more money to cover expenses and less time she needs her money to last, so she will be much better off than Robert during her retirement.
Early retirement. So far we looked at the effects of delaying withdrawals, but it works the other way, too. Let's add another example. Dora accumulates $500,000 by the time she's 55, and then phases into her retirement without withdrawing from her nest egg until she's 65.
|Robert age 60||Jane age 60||Dora age 60|
|Begin withdrawal age||60||65||65|
|Retirement fund||$500,000||$669,100 (5 additional years at 6%)||$895,400 (10 years at 6%)|
|Years in retirement||20||15||15|
|2012 withdrawal||$32,393||$0 (delay for 5 years)||$0 (delay 10 years)|
Each year, Dora will have 66 percent more money than Robert and 15 percent more than Jane. More importantly, she can quit her job at 55 and work minimally for 10 years before retiring full time.
It's important to note that these calculations did not include tax rates or Social Security payments, but the point is still applicable. Saving up early and then delaying retirement withdrawals will enable you to have more income when you retire full time. Even if you can't put off retirement, consider putting off retirement account withdrawals if at all possible.
Joe Udo is planning an exit strategy from his corporate job by reducing expenses and increasing passive income. He blogs about his journey to early retirement at Retire by 40.