The Benefits of Retiring One Step at a Time

By Features Bankrate.com

Older Americans increasingly are working well into their 60s or 70s to better prepare for retirement. Some take a phased retirement approach, working fewer hours or changing careers altogether.

Continue Reading Below

Easing into retirement can take many other forms: buying a second home early, taking more frequent vacations while still working or living on a smaller budget -- a form of "practice retirement" -- to name just a few.

Retirement is one of the least-planned aspects of life for many people so easing into it financially is a good step, says Bo Hanson, CFP, a financial adviser with Preston & Cleveland Wealth Management in Georgia.

"In this country, retirement has sort of become this mythological thing where people think it's magically going to happen," Hanson says. "At 65, you're going to retire."

Hold off on Social Security

One of the best ways to ease into retirement is to live within your means and not rely on income from Social Security benefits until age 70, financial planners say. Starting at age 62, for each year that you postpone applying for benefits, you get 8% more per year in benefits, says Kenn Tacchino, a professor and director of the New York Life Center for Retirement Income at The American College in Bryn Mawr, Penn. It's the easiest raise you'll ever get in your life, he says.

Continue Reading Below

Some people want to start collecting as soon as they're eligible at age 62, says Tacchino. But that's not the way to do it, especially since people can just about double their monthly income by waiting until they're 70.

"The question is, do you want the money at age 62 to buy a boat, or do you want a lot more money at 90?" he says.

If You go Back to Work

Most baby boomers reach full retirement age in their 66th year -- meaning they'll get their full Social Security benefits at that age. But for people who claim the benefits before then and subsequently find they have to return to the workforce, the benefits will be cut back by $1 for every $2 more than $14,160 earned in a year (as of 2011), says Dorothy Clark, a Social Security Administration, or SSA, spokeswoman. At the beginning of the year in which they reach full retirement age, the threshold goes up to $37,680, when one of every three dollars is cut back by the SSA. (The threshold figures can change over time, in line with the cost of living.) Once they hit the month in which they reach full retirement age, retirees can earn any amount without it affecting their Social Security benefits.

Workers who begin collecting Social Security early but who want to stop taking the payments and restart later at a higher rate can only do that within a year, but they have to pay the money they'd already received back to the SSA, says Christine Fahlund, a senior financial planner at T. Rowe Price. This allows people to restart the clock with a bigger benefit at a later date.

However, workers who wait more than a year after they start collecting benefits can't repay the money and restart their benefits later. At full retirement age, they can voluntarily suspend their benefits until as late as age 70 to get delayed retirement credits. Once they resume drawing Social Security, their benefit will be larger than what they had been receiving but lower than the benefits they would have received if they had never started taking benefits in the first place, says Fahlund.

The SSA says it recalculates benefits to credit people for months when they didn't get a benefit while working.

Bottom line: You have plenty of options, but it's best to determine your needs before you begin drawing Social Security in the first place.

Practice Retirement by Traveling

Along with many planners, Fahlund recommends delaying Social Security to age 70 if possible. She suggests working full time into your 60s and suspending contributions to the 401(k) plan or other retirement fund. Instead, use that money to travel on weekends or do whatever you want to test the retirement waters.

Her rationale: Investing in your 60s won't result in much of a return if you're going to retire soon anyway. The money doesn't have as much impact on your retirement fund as it does in earlier years.

"The trade-off is yes, you'll be working longer, but you were probably going to be working longer anyway," says Fahlund.

Using money in your 60s that would have normally been contributed to a retirement account is a great way to explore retirement and doesn't set a retirement account back as much as you'd think, she says.

That may be true, says Dennis R. Marvin, CFP and owner of Marvin Wealth Management near Cleveland, Ohio. But contributing to a 401(k) with an employer match is still a great deal that shouldn't be passed up, even at age 60.

"Any time you can put in 60 cents and immediately have $1, that's a good deal," Marvin says.

A better phased retirement approach is to work part time toward the end of your career, cut expenses and see if you can live within a smaller budget, he says. Marvin suggests aiming to replace 70% to 80% of your full-time working wage in retirement.

Second Home?

Jan Jumet, 45, is following his retirement dreams early. He bought a condo in Scottsdale, Ariz., to retire in -- though Jumet and his wife plan to use it until then to get away from the winters at their home in Darlington, Pa. The 1,200-square-foot luxury condo cost them about $500,000 -- half the asking price when compared to 2008, when it was built.

If a luxury condo isn't within your budget as a way to ease into retirement, consider sticking with the advice of delaying Social Security until you're 70.

"You've got to look at this as insurance against poverty and old age, and this is the best way to do it," said Tacchino, 54, who is writing a study on Social Security.

What do you think?

Click the button below to comment on this article.