How to Get to Retirement? Practice!

There has been a steady drumbeat of downbeat news about retirement lately.

More than half of us won't have enough money to maintain our living standards in retirement�even if we work to age 65, about two years past the average retirement age, according to various estimates. No wonder more people are working into their golden years, or planning to do so.

But here's the good news: Working longer allows you to start playing sooner, says Christine Fahlund, vice president and senior financial planner at T. Rowe Price Group.

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Close Greg Clarke

In her view, there are three kinds of retirees: the "cliff diver," who works to normal retirement age and then retires; the "worker bee," who works longer and delays retirement; and the "retiree in training," who works and starts retiring throughout his or her 60s. Which type of retiree you choose to be can have a big impact on how much money you will have to spend.

The share of people age 65 and older in the workforce rose to 16% in 2010 from 12% in 1990, according to new data from the U.S. Census Bureau. Nearly one-third of 65- to 69-year-olds were working or actively looking for work, compared with less than 22% two decades ago.

Meanwhile, 62% of 45- to 60-year-olds surveyed last year plan to delay retirement, according to a recent report from the Conference Board. In 2010, only 42% of workers in this age group planned to do so.

The reasons are painfully familiar by now: fallen home values, job losses, depleted savings and low interest rates�not to mention the disappearance of guaranteed pensions and retiree health-care benefits, the rise in Social Security's full retirement age and people simply living longer, healthier lives.

"I am not surprised that more people are working past 65, but I hope they make a point to enjoy the decade of their 60s by practicing retirement," says Ms. Fahlund. "Work, but start living some of your retirement dreams at the same time."

Working through your 60s, even if only part time, allows you to spend from your wages instead of your savings, she explains. This gives your nest egg more time to grow and shortens the time you'll need to support yourself on savings alone.

It also allows you to delay taking Social Security benefits and to scale back, or even discontinue, contributions to your 401(k) retirement plan.

Although you can begin receiving Social Security benefits as early as age 62, your starting benefits will increase approximately 7% to 8% for every year you put off taking them, up to age 70. In addition, the higher your initial benefits, the larger the dollar value of any annual cost-of-living adjustments.

The result: By waiting until age 70, your Social Security benefits would have almost twice the purchasing power than they would if you had started them at age 62, says Ms. Fahlund.

As for your 401(k), she says contributions in your 60s are the least important because there's less time for them to compound, so you should consider contributing only enough to qualify for any employer matching contributions.

What this does is free up money to get your financial house in order and start enjoying the life you envision for yourself in retirement.

Take a couple, both age 60, with a combined salary of $100,000 and a $500,000 nest egg. If they saved 15% of their annual income until age 62 and then retired�the cliff-diver approach�their retirement income from savings and Social Security would be $52,000 per year, and their cumulative total income from age 60 through 69 (net of retirement-plan contributions) would be $586,000 pretax, assuming various investment, inflation and withdrawal rates.

If instead they saved 15% from age 60 through 69 and retired at age 70�worker bees�they'd have $96,000 a year in retirement income, plus total income in their 60s of $850,000.

And what if they stopped saving at age 60 and retired at 70�retirees in training? They'd have $88,000 a year in retirement income�$8,000 less than the worker bees�but $1 million in total income through age 69 because they stopped making contributions to a (401)k�$150,000 more than the worker bees and nearly twice as much as the cliff divers.

With that extra money they could, for example, pay off their mortgage, make some home improvements, or buy some big-ticket items, such as a new car or recreational vehicle.

If after two times in the wilderness they decide RVing isn't for them, they will have learned a valuable lesson without squandering their nest egg in the process.

— investingbasics.wsj@gmail.com