Pretirement: Keep the paycheck, live the lifestyle

(Money magazine) -- I recently heard about a new way to look at retirement that involves staying on the job but stopping your retirement account contributions so you can use them to fund a "practice" retirement while you continue to work. The concept seems appealing. Can you tell me more about it? -- Paul Morgan, Brookhaven, Miss.

Whether you call it "practice retirement" or "pretirement" or just think of it as a way to ease into your post-career life while you're still working, the idea is to reap some of the financial benefits of staying on the job longer while also enjoying some of the perks of retirement.

Here's an example of how this idea might work: Let's say you're 60 years old and eager to retire at 62, when you can begin collecting Social Security. But there's one hitch: your nest egg won't be quite large enough in two years to generate enough lifetime income -- in addition to Social Security -- for you to enjoy anything close to your current standard of living.

The usual advice is to keep working until age 66 or so and continue socking away dough in your retirement accounts. By doing so, you'll not only be able to retire with a much larger nest egg, you'll also qualify for a much bigger Social Security check.

But while that advice is certainly sound (and what I normally recommend), slogging it out for more years in the workforce simply isn't very appealing to many people. Given the choice between spending more time in the work-a-day world or opting for a less cushy retirement, many people might just choose to downsize their retirement dreams.

That's where "pretirement" comes in. The idea is to get yourself to view those extra years on the job in a different light. Instead of thinking of them as an unrelenting grind, look at them as a chance to get a jump on some of the activities you're looking forward to in retirement: traveling, starting a new hobby, taking adult-ed classes, etc.

To help afford these pre-retirement activities, you can skip or cut back on contributions to your retirement accounts.

For many people, that could free up anywhere from 5% to 15% of their income for extra spending each year (although, remember, pretax earnings you don't stash in a 401(k) or similar account will be taxed).

At this point, I can almost hear the collective roar of disapproval from financial advisers and committed retirement savers, aghast that I would even suggest such a strategy.

Stop saving? Why, if people follow that advice, they'll have a smaller nest egg and less sustainable income in retirement than if they had both worked and saved a few more years.

And that's true. Except that not everyone is going to follow the "right" course of staying on the job and continuing to feed their retirement accounts.

The idea behind the "pretirement" approach is to find a way to entice someone who might otherwise leave his job to stick it out at least a bit longer. That way, even if he doesn't save for retirement those last few years in the workforce, he will still get some of the other financial benefits of an extended career: a bigger Social Security check, a larger nest egg (since he won't be drawing from it while working) and fewer years of retirement to fund from savings.

Most importantly, though, is that someone who stays on the job longer will be better off financially than one who leaves early, even if the person sticking it out doesn't save another cent in the final years of his career.

But don't take my word for it. You can see how the numbers work for a hypothetical 60-year-old couple who are short on savings and trying to decide whether to retire early or try out a practice retirement while still working.

I want to stress, though, that such a "test drive" funded by money that would otherwise go into savings isn't appropriate for everyone. If, after checking out a calculator like our Retirement Planner, you find that you don't have nearly enough resources to maintain a reasonable standard of living after retiring, then the prudent choice is to remain on the job and save every penny you can get your hands on.

Also, if you're in a 401(k) that offers matching funds and you decide to go the "pretirement" route, you may still want to contribute enough to your plan to take advantage of at least some of the employer match. It would be a shame to give up the practical equivalent of free money.

The bottom line: If your nest egg isn't too far short of where it needs to be, getting a head start on some of the advantages of retirement may provide the incentive you need to hang in longer at your job.

Who knows? You may find those last few years at work more pleasant than you'd imagined. And if nothing else, you'll be financially better off than if you had beaten a hasty exit.