Your new clients, the Eager-Retirees, have accumulated $500,000 by saving 15% of their joint salary of $100,000 a year. John has already plotted a three-month tour of Asia. Susan wants to earn an advanced degree. They come to you asking if they can afford to retire in two years, when they'll both be 62.
Here's a novel idea: Suggest that they stop saving instead. They may be able to spend the money on two-week trips and night classes, get a taste of the future and end up more secure.
The idea comes from T. Rowe Price, which found that this couple could expect $52,000 in retirement income in current dollars if they retire at 62 and begin taking Social Security. That's a big drop from their current income of $100,000. If the Eager-Retirees stop saving but work full-time until they both turn 70, their yearly income as retirees might be $89,000 - more than the $85,000 they're living on now. Their nest egg would be as much $784,500 at age 70, compared with only $535,200 in the first plan.
It can be hard for clients to appreciate the power of just a few years of extra work in their 60s. One key reason is that Social Security benefits grow by about 8% a year. In fact, a 62-year-old can increase her purchasing power by 30% if she works another four years - without saving. To get the same boost in three years, she needs to save 25% of her salary.
The calculations involve a trade-off between time and money. With flexible careers, the Eager-Retirees might also work less, giving them more time to pursue interests. This only works if the couple doesn't take Social Security payments - and their savings keep growing.
T. Rowe is assuming 7% annual returns over the next decade. If the markets take a big dip, the couple would be wise to save more, spend less or find ways to earn more.
Delaying retirement to contribute to an employer-sponsored retirement plan with a match also makes sense. In addition, the Eager-Retirees can use the time to pay off mortgages and other debt.
"Many planners used to recommend taking your Social Security benefits as soon as you become eligible," says Christine Fahlund, a senior financial planner at T. Rowe. "But today, with greater longevity, delaying Social Security for as long as possible may be the best strategy if you can afford it." Easing your way into retirement activities and being less frugal may also be the best way to stay happy.