Friday, March 18, 2011

A Novel Retirement Strategy? Or Planning to Fail?

Recently, I came across an interesting and thought provoking retirement strategy.  Christine Fahlund of T. Rowe Price proposes the following way to make sure you have enough money for retirement:

Continue to work until you are age 70.

Sounds like fun, huh?

In order to make it more palatable, she offers the following perk.  If you retire when you are 70, you can stop contributing money towards your retirement at age 60 and use that extra money for vacations, a new car, Botox treatments, or other little indulgences to make up for the fact that you can't just up and move to Florida and play golf year round.

Here is an illustration of how the financials might look for a typical married couple (courtesy of T. Rowe Price):

On the one hand, this makes some sense.  By delaying your retirement, you get the following benefits:

1. Your retirement nest egg doesn't have to last as long, since you are going to be spending less time in retirement.

2. Your retirement nest egg has more time to accumulate interest.

3. Retiring at 70 allows you to max out your Social Security benefits.

4. If you are lucky enough to have a traditional pension, retirement at 70 allows you to have a larger pension payout.

However, there are some huge caveats with Ms. Fahlund's proposal.

1. The strategy assumes that you have saved up a sizable chunk of money by the time you are 60.

2. The strategy assumes that you will be able to work until you are 70.  You may not be able to work that long due to your health, your family's health, or loss of job.

My opinion is that this strategy is half right.  I agree with the notion that deferring your retirement date will help your finances in retirement.  You maximize your Social Security and pensions while minimizing the amount of time you spend in retirement.  However, stopping contributions to your retirement fund altogether seems a little bit risky to me.  By following this strategy, you are assuming that you will be able to work until you are 70.  You are banking on too many things going right.

You are banking on the fact that your retirement money will continue to earn a good return.  What if the stock market tanks in those 10 years?

You are banking on the fact that you won't lose your job.  What if you get laid off and cant' find another comparable position?

You are banking on the fact that your health and your spouse's health will allow you to continue to work.  What if you get sick and are unable to work?  What if your spouse gets sick and you have to be his or her caregiver?

Those are risks that are out of your control to a large extent.  In order to mitigate this risks, you can do something that is under your control:  continue to save money just in case.  Knowing the risks and doing nothing about it seems like a plan to fail to me.

1 comment:

  1. Nice thoughts, its gives us much more help in educated knowledge about retirement strategy and planning.