Semi-retirement: A win-win trend?

It might very well become a win-win trend: As a result of the pandemic, some older Americans who were planning to retire are opting to remain in the labor force because they can now conveniently work from home, employer permitting.  

Both the financial gain and scrapping an often arduous commute are key drawing points, Christine Benz, director of personal finance at Morningstar, tells BenefitsPRO’s sister site ThinkAdvisor in an interview. She’s watching to see if an increasing number of pre-retirees jump on this now widely available alternative.

Retirement has undergone big changes over the last two decades. Essentially, it used to be: Stop working, receive a company pension, start collecting Social Security, hightail it to the links.

Now, semi-retirement has become a popular variation. Benz calls it “a phenomenon.” And, as she notes in the interview, people are choosing to define it in a variety of ways.

Others are trying “faux retirement,” a trial run to see how the life they envision in retirement might actually feel.

A disappointing turn of events for most any retiree, however, is continuing low interest rates. But people “have to make peace with the fact that the safer assets in their portfolio will have very low yields,” Benz argues.

They need to recognize that “the point of those safer investment assets isn’t return on capital; it’s return of capital.”

Benz started her career at Morningstar as a copy editor more than 15 years ago, advancing to mutual fund analyst, then to director of the mutual fund analyst team.

ThinkAdvisor recently had a phone interview with Benz, who was speaking from the Chicago suburbs.

Focused on retirement planning, the conversation eventually turned to how to plan and pay for long-term care. That’s when the co-host of the interview podcast “The Long View” brought up what she has dubbed a “come what may” bucket.

For wealthy clients, this extra bundle of assets can come in handy to draw from late in life.

Here are highlights of our interview:

Have you noted any potential new retirement trends?

CHRISTINE BENZ: The pandemic has changed the nature of work for many people, who are now able to work from home, at least part of the time. 

This is still in the early days, but I’m keeping an eye on people who might have otherwise been inclined to retire soon but plan to stick it out and work longer.

Especially from a financial standpoint, they’ve decided it makes sense to continue working since it might be easier for them: They don’t have to commute, and also, they can [relocate] to where they want to live.

They may be people in their early 60s who wanted to retire when they were 65 or so and also people who are post-65 and have decided “I think I can hang on till I’m 70” and potentially hold off on [claiming] Social Security.

Is the idea of semi-retirement gaining momentum?

It’s a phenomenon. People are dealing with it in different ways. There are financial reasons why they might have a hybrid semi-retirement.

In addition, many might derive a sense of purpose from their work: Continuing to keep a hand in gives them that sense of vitality and personal connection they may be hard-pressed to replicate without work.

Will these folks stay in the field in which they built their career?

They might continue that but now work in a scaled-back fashion. 

Or maybe you’ll step out of that field and get a job that doesn’t tax you in the same way, like working at Trader Joe’s, where, at the end of your shift, you’re able to walk out and not think about work.

You spent part of your last sabbatical taking a “faux retirement.” Tell me about that concept.

It’s a trial run, an experiment, to see what retirement might actually feel like. It can be valuable to think things through living out your days in the way you expect to when you’re retired. 

Afterward, you can figure out what you liked about that and what you didn’t like.

But that sounds similar to going on a vacation, rather than experimenting with an actual day-in, day-out way of life. Thoughts?

That’s definitely a risk to guard against: You need to recognize that retirement [likely] won’t be all golfing and going out to lunch.

It’s important to think about what your sense of purpose will be in retirement. You need to create a plan. I don’t think you’d want to wake up on Day 1 of retirement without thoroughly thinking about what your days might be like.

On the financial side of retirement, to what extent will ongoing low interest rates impact retirees?

Retirees have to make peace with the fact that the safer assets in their portfolio will have very low yields attached to them. 

They need to recognize that the point of those safer investment assets isn’t return on capital; it’s return of capital. It’s the ability to spend those assets if you need them or if your equity assets are down. 

Cash and high-quality fixed income assets still serve that purpose despite the fact that yields are very, very low.

How should retirees and pre-retirees protect their assets from rising inflation?

Retirees, especially those living on fixed-rate investments, can think about protecting purchasing power in a couple of different ways.

One is making sure their portfolio has an ample allocation to equities because over time, stocks tend to have a higher return than the inflation [rate].

And within the safer portion of the portfolio — fixed income — retirees can look at I-bonds and Treasury inflation-protected securities [TIPS].

At what point would a retiree acquire such products?

Ideally, a financial plan would factor in all these risks in advance rather than your being reactive [to what’s happening in the economy].

The last thing you want to be doing is adding assets to a portfolio when the risk of something is already apparent. 

[Like now], trying to buy inflation protection today, when inflation has been splashed across the headlines for several months.

What sort of plan should retirees have for long-term care?

There’s a lot of sad baggage that accompanies long-term care decision-making, and long-term care is also very costly.

People on the wealthier end of the spectrum may be able to self-fund those expenses from their assets. 

The key will be to make sure their financial advisor is right-sizing that long-term care fund and segregating those assets from the spendable assets.

For such clients, I like the idea of having what I call a “come what may” bucket to pay for long-term care expenses or for additional funds once the client’s portfolio is depleted. 

It’s an additional bucket to carry you through those sorts of late-life situations.

If neither of those eventualities comes to pass, you could use the fund to perhaps give assets to your children, grandchildren or to charity.

At the other end of the spectrum are people who will rely on government-provided long-term care, which is Medicaid.

What about buying a long-term care insurance policy?

That might be [appropriate for] the middle group. One would be traditional long-term care insurance and the other, a hybrid-type product, which is either life insurance with a long-term care rider or an annuity product with a long-term care rider. 

The hybrids have become a lot more popular over the past decade, especially because premiums on pure long-term care policies have increased substantially.

In general, do annuities have a place in a retirement portfolio nowadays?

When you look at all the academic research, there’s a compelling case for holding an annuity as part of a retirement plan as a means of enlarging your lifetime income stream. 

A very basic low-cost annuity can be a good fit for some investors.

Any tips about 2021 tax planning for retirees and pre-retirees?

I like the idea of doing a little preemptive tax planning, like considering whether a conversion of a traditional IRA asset to a Roth IRA might be appropriate.

For example, if one spouse has retired and the other hasn’t, that can be a good situation to consider for a conversion when their tax bracket is relatively low.

Another idea for retirees is a qualified charitable distribution [QCD], where you’re taking a withdrawal from your IRA and sending it directly to a charity so that it never touches your adjusted gross income. 

You’re able to get a tax break on the charitable contribution, which many people aren’t eligible for because they’re claiming the standard deductions versus itemizing.

What’s one critical concern for retirees to keep in mind nowadays?

The face of retirement has changed pretty drastically over the past couple of decades. 

As recently as the 1990s, it was tenable for retirees even without a lot of wealth to subsist on withdrawals from their portfolios.

Today, that’s not a reasonable way to go about retirement decumulation. If you have a portfolio with a 3% or 4% yield, you’ve got a very risky-looking portfolio.