Retirement Test Run

While reading this month's issue of Money magazine I saw an idea I've seen several times lately. Their words:

"[Try] living on [your] projected retirement income as a test run of the real thing."

Specifically, they are suggest that people determine their expected retirement income, then, before they quit working, live on that income for a year. If everything "works", then you're good to go. But if not, if you simply can't make it on what you will earn post-career, you still have options (namely, you can work longer.) Once you get off the career track, it may be difficult to get back on, hence the reason for a test before you get off.

I like this idea. A lot. It gives potential retirees a real feel of what it's like to live on what will likely be a reduced income -- perhaps an income that is significantly lower than any they've had for many, many years. It's something I think I'll do when I get to that point.

I've also heard that people should test retirement from a time standpoint as well. They should try to take extended vacations and see how (even if) they can fill the time. After all, if you don't have to go to work every day, what will you do? You can only play so many rounds of golf. Again, I think this is a great idea. And why not try it?

How about you? Did any retirees out there do a test run before you quit working? Or those who are planning to retire soon, will you do a test run?

Comments

[Jane Savers @ The Money Puzzle]

I am sure I could fill the time off but I know I don't have enough money. I will be living a very simple retirement with books from the library and live entertainment from free concerts that my community offers. Instead of a gym membership I will be walking around my neighbourhood and on the local walking trails.

I have set my number at $20,000 per year for what I will need to live.

The high point of my day may be my naps. I love napping but I can't do it most days because my boss does not think it is a productive use of my time. I am hoping to make it a regular part of my day in the future.

[Matt]

I have also seen mention of "test drive your retirement" articles. None are that much help other than you should try it before you buy it. I think you will need to with so much uncertianity in markets, future taxes and who knows what that this really needs to be done. I assume this is setting up an income stream from your investments. How this is done is up to you I guess.

As for having enough to do, I am not concerned. My father and other people who have retired have all said that they are even busier retired then when they were working.It was a matter of trying to fit it all in within the week.

[Mrs. Pop @ Planting Our Pennies]

We're experimenting with early retirement models and one of the aspects of all of them is that we need to live on projected retirement income for 5 years (allowing for inflation increases each year - and into retirement) before actually retiring.

[Old Limey]

If you are disciplined in your approach to money and your finances it's not too difficult to take your current expenses and extrapolate into the future.

There will be unexpected expenses. I had one which was a $20,000+ expense for a new tile roof. Over the 20+ years since we retired I also gave my son several substantial (interest free) loans, each of which was duly paid back.

However the fact that we each had a pension and together they are enough to meet our basic living expenses made retirement very easy for us. I only used to take money out of our investment portfolio for expensive vacations but since 2010 was our last year for overseas trips that's no longer an issue.

One thing that I hadn't really thought about was that once you are forced to take Minimum Required Distributions from your IRAs your tax bill increases dramatically. The solution is just to have your State and Federal taxes withheld from your distribution as you move the money into a taxable account. Consequently I am paying higher taxes now than at any time in my life. I don't see any alternative, in fact that's the way IRAs are designed to work. In spite of this our IRAs continue to grow each year because of investment gains. Thus it's a little aggravating to have to pay a lot of taxes but it sure beats being poor.

[Ron Moon]

A modified way to "try it before you buy it" is to take the projected end of your earning years and extend your working by one or two or more years. Take ALL the earnings from those one or two extended years and give it to charities of your choice. Now you have done two things: you have tested your portfolio and living expenses to see if you can pull off the retirement you want financially, and you have made significant contributions to your chosen charities. A last advantage is that if you get to the end of the year or two and realize your financial plan is not working as expected you may simply extend your career again for a year or more but return to working for yourself instead of your charities...you have not lost your skills and can still earn your historical pay.

As of now I am planning to implement this in four years, when I am 50, for two years and then retire. In effect, financially I am retiring at 50 but will continue working in my current job to 52. If my plan doesn't work - the markets tank or some other event occurs - I can simply keep working and nobody at my employer is the wiser.

A corollary to this strategy is that four years ago my wife and I determined we earned "enough", apparently a difficult word for most to determine. Since we felt we earned "enough" we have diverted all of our raises in the past four years to charities of our choice and lived on and saved the remainder for ourselves. This in addition to our base giving has slowly grown into something that is making a difference. A final thought is that when you divert all your raises to something other than yourself it has, in my case, freed me from the stress of pushing myself and others to the brink for the best possible raise and bonus. Shame on me for thinking that way historically, but we all mature and grow at different rates and times. I just wish I had gotten to this point earlier in life, and recognize there is a lot more growth to come.

[Steve @ CreditCardsReviews.org]

I think when I retire from my job, I will want to start a part time business that would be fun to do. I am thinking about some type of vending business maybe with a combination of Candy, Coffee or even Crane Machines.

This can not only be a nice passive extra income, but can be fun in regards to the social aspect of talking and dealing with other business owners in my community.

I know many people want to retire and think about reducing income, but I am looking at replacing it with some type of other type of business so I can still vacation and have fun at the same time.

[Lacy @EarnVerse]

Love this idea of a test run. I will definitely keep it in mind when I get to that point as well (still pretty far off).

I also like your point about trying out some extended vacations to see how you feel about it, and how you fill the time. My husband and I have actually done this and I found that I actually missed working. So for me when I think about retirement I am thinking more about flexible work options or causes that I could contribute to. Don't get me wrong,just relaxing with a good book is amazing. But that get's old in about a month. My suggestion would be to figure out how you are going to keep your mind stimulated during retirement/extended vacations. I think it makes it more enjoyable.

[freebird]

Just finishing a one-month test run now. Haven't been off work or school for this long in 30 years. It wasn't boring as I expected, lots of stuff I never paid much attention to seems interesting now, so I think I'm good to go. Giving my two weeks shortly.

For me the money side is the easy part, I've been living small for years now, which is why I'm done before 50. The sad part is how I misjudged my spending needs so worked several years longer than I needed and lost the chance to reconnect with older relatives who aren't here anymore. My future spending isn't constrained by retirement income, I'll be spending savings as well.

[Tommy Z]

I'm nowhere near retirement age, but by the time I get there, I believe retirement will be something you only see in old TV reruns similar to how households where the wife stays home and lives only on the husband's income is something you only see on those 50s TV show reruns.

However, People near retirement today may find this experiment very hard to complete. Some people may find that it's not Possible to live on their retirement income all are still working today because so many of their expenses today are related to their job. For example, gasoline to drive back and forth to work can be a major portion of a household budget that suddenly disappears when somebody retires. Therefore you may find that some people will conclude that they cannot afford to retire, but in reality they probably could.

For other people, you'll have the opposite effect. Several people may find that their retirement spending actually needs to increase compared to what their preretirement spending is. For example, somebody that's currently working and the majority of their healthcare expenses paid as an employee benefit may not be able to afford to pay the entire amount themselves especially if they're looking to retire before they get Medicare benefits. Additionally, anybody that retires will certainly find a large amount of free time on their hands... And they may use that free time to spend on leisure activities that they otherwise would be spending on had they been at work during the day.

Therefore, I don't think going through this exercise will be very indicative of ones retirement spending,

[Strick]

Did similar budget 'live test' before wife quit work to stay home with kids. The additional savings was a nice side effect.

I think the extended time off test is a really good idea. Or move to a part-time/consulting plan with employer. My dad found that, even though 50 hours/wk can make work unsavory, at 15 hrs/wk it was a nice 'hobby'. And nest egg-wise there really is a huge difference between a little work income and none.

[KJ]

My mother (a widower) is in the position of actually making more by retiring than what she currently makes working full time. Her years of service (30 and counting) and the way her state pension retirement plan is structured make this true. And the longer she continues to work, the greater the amount above her current income she will make when she eventually retires. This is a positive thing but once she retires her income will not get any cost of living adjustments. She's been putting off retiring because it's hard to predict future expenses, especially medical expenses. She knows once she pulls the trigger there's no going back to her current or even a similar job without a huge loss in salary/benefits. It's also been hard for her to re-imagine what type of retirement she wants after losing my step father several years ago.

Those for whom life revolves around their work may find filling the time retirement gives difficult. My father (whose life and social contacts basically were his work) retired a little over a year ago and immediately put in for a contract position at the same agency of his previous employment. He was required to be "retired" for at least 3 months before being eligible for rehire and he struggled, especially at first, to fill the open time. It also didn't help that his children/grandchildren all lived a long distance away.

[Jose]

I like the concept. The only problem I see is that my housing expense is going to be a lot different than it is today. I suppose I could make some adjustments to compensate for that but it kind of throws a little bit of a smokescreen over every thing. There's other expenses I currently have that I wouldn't have in retirement or semi-retirement that i have to factor in as well. I may have to drag out excel and have some spreadsheet fun :).

[Rob @FinancialSprout]

If you think about it, if your projected income a year is 20k when you retire and you run a test run, you'll have all of that other money to put into your retirement. Basically, by seeing if you really can retire, you're setting yourself up for a better retirement. Either way it's a win-win situation.

[AZ Joe]

I liked Rob's comment. My wife and I did a "trial run" on retirement when we were "sprinting toward retirement." We lived on my income (less than our anticipated retirement income)exclusively and paid hers into an annuity for about 1 1/2 years. When we retired, we had "been there" and the financial part was pretty smooth sailing.

As to the issue of managing time, Joe Dominguez (Your Money or Your Life) has a very good last chapter about what to do after you retire. That worked well too.... Nine and a half years and counting.

[Old Limey]

@Jose
When I retired in 1992 my 4br,3ba home on a 1/3 acre lot in Silicon Valley was paid off and the largest annual expense were the property taxes of $1,391/yr. Thanks to Prop 13 in California our property taxes are not allowed to increase by more than 2%/year. My 2012 taxes were $2,396 an increase of only $1,000 over a 20 year period. Homeowner's insurance has also only increased slightly over the last 20 years. The item with the largest increase is undoubtedly "Utilities", i.e. Natural Gas, Electricity, Water, Sewage, and Waste Disposal since energy, just like gasoline has risen steadily over my lifetime. Likewise the salaries of the individuals that provide the utilities also increases steadily.

It is very important that you own your home outright when you retire, the last thing you want to be is a renter and be subjected to the whims of the rental market over which you have no control.

Healthcare insurance can be a big factor for retirees, especially if you are not eligible for medicare. Unless you are able to be covered by a group policy of some kind the costs are very high for very poor coverage and the premiums increase as your age increases. A spreadsheet isn't going to be much help I'm afraid since you don't know how your premiums will increase every year.

My wife and I planned our retirement very well. We have three sources of income.
1) We each have retirement pensions.
2) We each took Social Security at age 62.
3) Our retirement nest egg has grown by a factor of over 20 between 1992 and 2013 and since it is now all invested in tax free bonds in our trust account and tax deferred bonds in our IRAs it generates income that is six times what we receive from our pensions and social security.

The net result is that our money will last a lot longer than we will and ultimately it will pass to our children. I have managed their investments for many years so all they will have to do is to just keep doing what I have been doing and they will also have secure retirements when the time comes.

[Nick @ ayoungpro.com]

Good idea!

[CoolHappyGuy]

I have actually been considering "testing" retirement. Here is my approach: Max out 401(k) contributions to the point where my take-home pay approximates my retirement income. We will then see if we can financially adapt to that lifestyle. If we can't, we'll decrease the 401(k) contributions appropriately. That way, if we are not prepared to retire, we have already some corrective actions through our increased 401(k) contributions.