Bridging the Income Gap

I plan on living at least until 90. That's not chutzpah talking; it's heredity. My grandmother lived to age 95, and my mom is going strong at 89. (The average life expectancy for women who make it to 65 is 86; for men, it's 84.) Given that I may have to stretch my retirement savings over 25 years or more, I'll try to wait past 66, my full retirement age, to claim Social Security benefits. For each year I wait, my benefit will grow by 8% until age 70, when it maxes out at 132% of the amount I'm due at age 66. With the extra income, I'll have less chance of running out of savings later.

But because I can't live on fumes, I'll have to find a way to make up for the missing Social Security checks for four years. One obvious solution would be to keep working full-time. Not only would my paycheck more than compensate for the benefit I'm temporarily forgoing, but my retirement accounts would keep growing, and I could continue to fuel them.

Take spousal benefits. I could also receive Social Security based on my former husband's benefit while postponing my own, then switch to my higher benefit at 70. Married couples can use a similar strategy by claiming one spouse's benefit and postponing the other's through a method called "file and suspend." (For a personalized recommendation of which claiming strategy would work best for you, visit kiplinger.socialsecuritysolutions.com.) Spousal benefits are generally equal to only half the other spouse's full benefit.

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If I decide to retire before 70, I'd have to supplement the spousal benefits by working part-time. Alternatively, I could take more out of my retirement accounts to cover the income gap until I hit 70. On the face of it, that strategy seems scary. Wouldn't taking bigger withdrawals early in retirement mean scraping bottom 25 or 30 years hence? In fact, says William Reichenstein, a principal at Social Security Solutions, the higher Social Security benefit you get by waiting until 70 not only increases your spending power but also extends your portfolio despite the earlier, bigger withdrawals. That's because bigger Social Security benefits will let you withdraw less from your retirement accounts to generate the same spendable cash. "If you have a long life expectancy, it's the right decision," he says.

Yet another idea: Keep working and postpone Social Security, but stop saving. This concept, called "practice retirement" by T. Rowe Price, lets you enjoy some of the perks associated with retirement while still pulling in a paycheck. "Maybe you were setting aside 15% or 20% of your salary. Instead, contribute enough for the employer match and enjoy the rest of the money," says Christine Fahlund, vice-president of T. Rowe Price’s Investment Services.

Granted, you'll lose some of that money to taxes, assuming you were contributing to a pretax account. But if you were saving the maximum ($23,000 this year in a 401(k) for people 50 and older), you could still free up enough to finance a few nice trips or home improvements. (Hello, hot tub!) You'll also be delaying Social Security, letting your savings compound and shortening the period during which you're withdrawing money in retirement. (For examples of various scenarios, see T. Rowe Price's "Practice Retirement".)

Of all the possible strategies, the idea of working longer and saving less appeals to me the most. Here's why. I like my job, so doing it for a few more years isn't the hardship it would be if I were less fortunate in my career. I've been saving my entire adulthood, and I would welcome the chance to splurge a little. If working longer at a job I enjoy also gets me a monthlong vacation in Provence or a Mini Cooper in which to cruise into retirement when I leave my job, I'd say that’s a pretty good trade-off.