T. Rowe Price preaches a new retirement message that doesn't involve retiring anytime soon
The bad news is that you work until you're 70; the good news is that you're going to Hawaii
5 min read- T. Rowe Price advocates "Practice Retirement," urging pre-retirees to work until 70.
- Strategy encourages spending would-be savings in their 60s on leisure instead.
- Advisors gain a less daunting message for clients with insufficient retirement savings.
Brooke’s Note: You have seen the charts. The ones trotted out to show that if we just pushed the national retirement age out a couple of years, all of the worries about the Social Security system would go away. It might not be politically feasible but, heck, it might be marketable if it’s done with some free-market flair. T. Rowe Price is betting along those lines.
T. Rowe Price has found a new way to sugarcoat a sour message that underfunded affluent baby boomers need to work more to retire better.
The firm is using a new strategy dubbed “Practice Retirement”; in which they tell pre-retirees who have saved a sizeable amount of money to continue working to age 70.
At the same time, the company is telling them it’s OK to stop saving for retirement in their 60s and instead use that money to travel and do the types of things they’d like to do in retirement.
Burnout factor
T. Rowe has discovered there are many affluent individuals – perhaps with around $1 million assets – who haven’t saved enough to retire at age 62. But at the same time, these folks may be feeling burned out and are eager to stop working so hard.
The genius of how T. Rowe Price's new robo extends its $165-billion automated advice franchise -- namely as a maker of target date funds
Rather than advising clients that they must work and save, advisors are now passing on this new Practice Retirement message.
They’re telling clients that if they continue to work they can spend the 10% of their earnings they would have saved – as long as they don’t dip into the retirement savings they have already accrued – and start using that money for fun activities such as travel.
The key is for clients to keep working and not dip into the retirement nest egg, says Marcie Daniel, lead marketing manager at T. Rowe Price.
“It’s more about the retention of assets,” she says. “We’re not saying in a vacuum that you don’t need to save, but people need to continue to work and not tap into their savings.”
Stuart Ritter: If they’re not psychologically
ready then we’re offering an alternative
to people that’s pretty attractive.
Story Timeline
Another option
Stuart Ritter, a financial planner at T. Rowe Price who coaches other advisors on these types of strategies, says advisors like having another message to give to clients.
Rather than bluntly telling them they haven’t saved enough, this allows advisors to offer a more positive message and encourage clients to start to have fun in their 60s while still working.
T. Rowe Price takes on the risk of its target date fund retirees outliving their savings -- by jacking up equity exposure even on the glide path
“It gives us another option,” he says. “We have talked to a number of folks who don’t want to continue working as hard as they have been and do want to play.”
T. Rowe has conducted an analysis that shows the benefits of working and retiring or practicing retirement. According to the company’s calculations, a person who saves 15% annually and retires at age 62 with a nest egg of $584,000 would have an annual retirement income of $52,000 including Social Security and would be withdrawing about $20,000 from the portfolio each year.
The same person who continues working until age 70, but stops saving in their 60s, would retire with $1 million in assets with an annual retirement income of $88,000 including Social Security. That person withdraws $35,000 annually from their portfolio.
However, if that same person decides to continue to work and save in their 60s and retire at 70, their annual income goes up just $8,000 a year to $96,000, up from $88,000 under the Practice Retirement plan.
In short, T. Rowe officials say that while saving until age 70 would be ideal, it’s more important to convince pre-retirees not to tap into their retirement accounts until age 70.
$15,000 flipped
In addition, a person in their 60s who saves $15,000 annually will discover those annual savings in that decade of their lives will have a small impact on the large nest egg whereas, withdrawing that money at age 62 would be a large blow to the account balance causing it to dwindle faster.
Ritter says clients love having an alternate option other than to keep working or completely retire.
“It allows them to look at retirement in a different way,” he says. “If they’re not psychologically ready then we’re offering an alternative to people that’s pretty attractive.”
However, Daniel cautions that not all clients will be in a position to pursue this new strategy if they haven’t saved enough. She also says that pre-retirees should strive to contribute at least enough to qualify for an employer match in their 401(k) plans.
Rely on RIABiz? Tell Google.
Naming us a preferred source puts our reporting first in your Top Stories and AI Overviews. Takes one click, and only you see the difference.