Tom Green has spent half his life away from his hometown of Muncie, Ind., logging more than 17,000 hours in flight time piloting commercial and corporate jets. He planned to retire in Muncie a couple of years from now, when he will be in his early 60s. But "retirement" came suddenly last September, when the major commercial real estate developer he worked for shut down its private fleet of jets. At 58, "I was forced to look at my options," says Green. "I guessed that my career was over and I'd better concentrate on a new one, just a bit earlier than I expected."
During his travels, Green had played with different ideas about what kind of work he might do next, in addition to trout fishing, hunting, and driving cross-country. He'd been toying with owning a restaurant in Muncie. So he tapped his savings and bought the Blue Bottle, a downtown coffee shop and restaurant. The first two months were tough, but business is picking up. Still, he's earning one-sixth of what he used to make. "But I think I can work for a long time [in this job]," says Green.
He is at the vanguard of a shift in how people are planning for old age. Against the backdrop of longer lifespans and a premium on brains over brawn, more employees are realizing that, in the long run, moving from a high-paying job they don't like to a lower-paying job they enjoy may entail less of a financial hit than they thought. The key is that the lower-paying job may allow you to work longer than if you'd stayed in the more lucrative career, so over time the blow to earnings lessens. And those "extra" years of income allow a portfolio to compound much longer before it's tapped. Says Ross Levin, a certified financial planner and head of Accredited Investors in Edina, Minn.: "You don't need to save as much, and you don't have to live off your portfolio for so long."
Consider this simulation from Laurence Kotlikoff, an economics professor at Boston University and head of ESPlanner.com, a financial planning software firm. Janet is a 55-year-old heart surgeon earning $250,000 a year, and she is burned out. Her husband Jack is also 55, but he is unemployed at the moment and has a modest earnings history. Their 16-year-old son will head off to college in three years. Kotlikoff built many assumptions into his model, from college costs to property taxes, but among the more critical figures are $500,000 in a 401(k), another $500,000 in assets, and $100,000 left on a mortgage. They'll take Social Security at age 70. The calculation assumes a 3% inflation rate, a 6% return on retirement assets, and a 5% return on taxable assets. (More details can be found in a case study on esplanner.com.)
Here's how the numbers could work: Janet quits her high-powered job for one that pays $65,300 a year. She offsets the big drop in income by tapping taxable savings. But Janet continues to save a small amount in a 401(k) and works until she's 75. Her family's standard of living would stay the same as if she had remained at her $250,000 job and retired at age 60. If she decided to kick back at 70, a salary of $73,250 would maintain her family's standard of living. If Janet chooses to retire at 65, she could live comfortably earning $113,555.
A safety net of savings is critical to making such a career transition. In the new way of thinking about retirement, savings are a way to gain the flexibility to eventually reshape your career—it's what funds career shifts throughout life. "The new goal is to have sufficient assets to liberate yourself to work," says Marc Freedman, head of Civic Ventures, a nonprofit that encourages baby boomers to launch new careers. "You save not to have freedom from work, but freedom to do the work you want."
Tom Green's transition was helped by the fact that he owned his home free and clear on 20 acres outside Muncie. He drew from his self-directed IRA for extra income. In some cases, a working spouse may be the backstop. That's the case for Hall Kirkham, whose high-powered career included 11 years at Cambridge Associates, a Boston consultancy that advises nonprofits on managing their endowments. Kirkham loved his job, made a good income, and met his wife there. "But I felt called to do something more," he says.
He eventually heeded the call and in 2005 entered the Episcopal Divinity School in Cambridge, Mass., at age 41. Kirkham is now a parish priest and assistant rector at an Episcopal church in Weston, Mass. His total compensation has plunged by 80% to 85%. The blow to his and his wife's standard of living, however, has been cushioned by her salary at Cambridge Associates—and he's on her health-care plan. They have paid off their mortgage, and the Episcopal Church has a good pension plan.
There are multiple paths toward second and third careers. The clergy is a popular choice among 50-somethings. So is working at nonprofit and charitable organizations. Civic Ventures found that 58% of the 50-year-olds it surveyed were looking for a second career that would make their community a better place. The federal government is recognizing the trend. Congress recently passed a national service bill that includes, for the first time in decades, opportunities for midcareer shifts, including a one-year Encore Fellowship that will help defray the costs of placing anyone 55 and older in management positions at nonprofits.
Scott Kariya went the nonprofit route. He was an information technology recruiter for 23 years, and the combination of a good income and a hefty stock portfolio allowed him to "retire" in late 2006, at 52. But he quickly became bored. So last year he hooked up with ReServe, a nonprofit in New York that helps place retired professionals with community organizations. He works three days a week for about $30,000 a year. The rest of his time is spent volunteering at the local Red Cross, visiting family in Washington, D.C., managing his portfolio, and doing whatever he wants. An added benefit of his new life: "If I were still an IT recruiter, I would be dead in this recession," he says.