Delay the Date, Not the Gratification

Christine Benz: Hi, I'm Christine Benz for Morningstar. Retirement planning is on a lot of investor's minds these days, and I am happy to say that Christine Fahlund from T. Rowe Price is here. Christine is T. Rowe's senior financial planner, and she has done a lot of research on retirement planning and managing your nest egg in preparation for retirement.

Chris, you and your team did some interesting work. I think you call it the "Work Longer" study. Can you discuss the research there and the findings and the takeaways for people who are getting ready to retire or thinking about retirement?

Christine Fahlund: Absolutely. What we found when we talked to individuals who were thinking about retirement was that many of them had not accumulated the amount of wealth they needed in order to be able to support the lifestyle they wanted in retirement.

And so we began to look at solutions for them. How could they do that fairly quickly? And when we looked at making additional contributions, that didn't seem to help that much. When we looked at changing your asset allocation to a more aggressive one, that didn't seem to help very much.

So we came away with two "a-ha" moments--things that really can make a difference. One is delaying the date of your retirement so your employer is paying for more of your expenses for more years. And the second one was we found that Social Security, by delaying that, the increases are significant in what you can obtain.

So together, we found that if you can delay retirement for even two or three years and delay Social Security at the same time, you can significantly improve your results for a really wonderful retirement.

Benz: So as you acknowledge, though, that is not a palatable answer for a lot of retirees. They hear "work longer, delay Social Security," that doesn't come easily for a lot of retirees.

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Fahlund: It so doesn't.

Benz: What do the studies say about what you could do in lieu of quitting work?

Fahlund: Well, what we found, as I said before, was the contributions really aren't helping you that much at that point in time. And so our suggestion is delay the date but not the gratification. So instead of contributing each year while you are still working, start taking those trips. Start spending those contributions instead. So that way, it is more of a gradual transition. You are already starting your retirement while you are continuing to work. And the results will really pay off in the long run.

Benz: So it sounds like an interesting strategy. If you are going to implement it as a pre-retiree, are there any caveats that you should keep in mind?

Fahlund: Well, two things to keep in mind. One is you certainly want to contribute if there is a match available through your employer. So contribute up to any match. And secondly, don't forget that the contributions you have been making have been pre-tax. So the amount you can spend is at an after-tax amount.

Benz: Right. Those are all good points. Thanks so much, Chris. Interesting research.

Fahlund: Thank you.