By MARTHA C. WHITE January
3, 2020
For
a growing number of Americans, “retirement” simply means changing where or how
you work.
More
than half of Americans age 40 and up expect to continue doing paid
work after retirement, according to TD Ameritrade. This
includes 86% of people in their 50s, while a remarkable 92% of people in their
40s expect to keep working after dialing back their main career.
Some
people embrace working in retirement as a positive choice, since they enjoy the
mental challenge or socialization a job provides. Others even undertake a
later-life “encore career” and launch a new professional chapter entirely.
Of
course, money is a big consideration as well. For some people, working in
retirement is the only way to make ends meet. A new report from the
Transamerica Center for Retirement Studies found that 84% of women who plan to
work in retirement say their motivation is financial necessity. And if you have
your heart set on realizing a lifelong dream to, say, open a distillery, you need to take a clear-eyed look at
your expectations for turning a profit.
If
you plan to work into your retirement years, financial advisors say there are a
few factors to keep in mind.
Although
we tend to assume that more money should always be the goal, a lucrative
retirement gig could mean higher taxes and bigger medical insurance bills
— and a potential haircut to your Social Security benefits. “People don’t look
at how it impacts their other sources of income,” says Matt Nadeau, a wealth
advisor at Piershale Financial Group near Chicago.
Hold off Drawing Social Security
Drawing
Social Security earlier than full retirement age (that’s 67 years old for
people born in or after 1960) reduces your monthly payment, so conventional
wisdom says you should wait until full retirement age to claim if possible.
“With
longer lifespans, it becomes more important to consider delaying Social
Security,” says Christine Russell, senior manager of retirement and annuities
for TD Ameritrade.
If
you plan both to earn income and draw Social Security between the ages of 62
and when you reach full retirement age, take note: For that period of time,
your Social Security benefits will drop by $1 for every $2 earned above
$17,640, and $1 for every $3 earned above $46,920. These deductions stop after
you reach full retirement age.
Calculate Your Provisional Income
The
government uses a metric called provisional income to determine how much tax
you pay on your Social Security benefits. This is calculated by
adding wages, dividends and interest (both taxable and nontaxable), pensions
and 50% of your annual Social Security benefits. Married retirees filing
jointly with a combined annual provisional income of less than $32,000 do not
have to pay federal income taxes on their Social Security benefits, but those
earning from $32,000 to $44,000 have 50% of their Social Security taxed. Those
with incomes of more than $44,000 have 85% of their Social Security taxed.
(Note, that doesn’t mean a tax rate of 85% — it’s just that 85% of the benefit
is subject to income taxes.)
There’s
an important question you have to ask yourself, Nadeau says: “How much does
each dollar of work impact my retirement plan?” He recommends engaging a
financial advisor to help with the calculations. If you’re married and file
jointly and your provisional income is over $44,000, then 85% of your Social
Security is taxed, but “if you control your income a little bit, if you work
just a little bit less, maybe it’s only taxed 50%,” he says.
Consider a Roth Conversion
And
keep in mind that once you reach the age of 72, your provisional income will
also include required minimum distributions (RMDs) from traditional IRA or
401(k) accounts. (The SECURE Act, passed late last year, raised the age for RMDs from
70½.) If you do the math and find out your RMD income will nudge you over the
line into higher brackets for taxes and Medicare premiums, financial advisors
suggest converting some of those assets into a Roth IRA before you turn 72.
“If
they’re not working for a year or two, you’ll see folks do conversions then,”
Russell says, since a drop in earned income that is not yet supplemented by
Social Security benefits could put you into a lower tax bracket, an advantage
when you need to pay taxes on Roth-converted funds.
Do the Medicare Math
How
much you earn also impacts how much you pay for certain parts of Medicare.
“Your Medicare Part B premium is based on your taxable income,” Russell says.
An individual with an income of $87,000 or less pays $144.60 a month in 2020
for Part B, but someone with income from above $87,000 up to $109,000 pays
$202.40 a month. The highest monthly premium, for individuals making $500,000
or above, is $491.60 (Note that your 2020 Part B premium is based on your 2018
income.)
Plan for Contingencies
Finally,
experts say you should be realistic about the physical and mental feasibility
of working well into your later years. Don’t assume you can take on additional
debt since you plan to work into your 70s, because a a health crisis or other
issue can derail those plans.
“The
top reason why people thought they could work in retirement but then could not
had to do with health — either their own health or that of a spouse or loved
one they needed to give care to,” Russell says.
Russell
says TD Ameritrade’s research finds that Americans want to keep their retirement
options open, a benefit that can have rich rewards if you do your planning.
“One
of the things that was very heartening is most people were considering working
for mental fitness reasons. They want to work to keep their mind sharp,” she
says.
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