The concept of a practice retirement has been around for many years, and it has been especially topical since the Great Recession took a toll on so many nest eggs. But practicing retirement before you take the plunge isn’t just about money; it’s about your emotional state as well.
If you are nearing the date when you plan to call it quits for good, here are three steps to finding out if you’re ready:
- Live the dream now Would-be retirees who must work longer for financial reasons can start living it up now and still be in a solid financial position later, according to a T. Rowe Price analysis. In a report, the fund company found that by working a few years longer and spending what you would have been saving, you can afford to travel and otherwise give retirement a test run—and still be in great shape moneywise when you finally quit work. This strategy allows you to use weekends and other free time to test cities you might like to live in and pastimes that you envision filling your time before you make the big commitment.Describing one couple, the report states: “They want to enjoy their 60s to the fullest, so they decide to discontinue making contributions to their retirement plan after age 61. This provides them with an additional $15,000 a year to spend while they continue working. With this extra income to enjoy life, working longer may not seem as much of a burden—it may actually reenergize them. One of the primary reasons this Practice Retirement strategy is effective is that each year they work and delay taking Social Security benefits, their benefits increase about 8%—almost doubling in purchasing power by age 70.”
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- Test your budget Your test run should include trying out your new budget for a few months. Track your current living expenses, then subtract anything you expect to disappear in retirement—a mortgage, car loan, some dry cleaning and commuting bills. Add expenses that may increase, such as travel, hobbies and medical. Now estimate income. Start with your expected Social Security benefit. If you’ll have a monthly pension or part-time job, add those amounts. Estimate how much money you will have saved and the expected return on your investments, and the amount you will withdraw each month. You may want professional help. But you can get started with a simple retirement calculator.
- Tweak your plan Did you have enough resources? Did you enjoy the activities that you could afford? Do you like your new schedule? Were you OK being away from family and friends? Now is the time to find out because you can change the variables. According to a report from the National Endowment for Financial Education: “The great thing about practicing retirement is that you can identify pitfalls and make adjustments before it’s too late. You might decide to stay at your job a few years longer or gradually step down into retirement by working part-time for a while. You might make it a priority to pay off all your debts before you retire or scale back your travel plans a bit.”
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You may even find that your dreams are not all that expensive. Learning to cook or play guitar, or volunteering to coach or teach or consult may keep you engaged and happy without a lot of expense.