If you are among the increasing number of people who continue to work into their retirement years, keep these tips in mind when planning for your financial future.
8 Financial Tips for Seniors Who Work
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The percentage of persons past the age of 65 who are still employed has risen because of the Great Recession. Even without a downturn, however, there has been a longer term trend of more people wanting to keep working. There is the money, to be sure. But many people stay on the job to retain professional relationships and a degree of social engagement they think will be hard to match in retirement. Much of our personal identity is related to our work; it can be tough to give up a big hunk of self worth along with the paycheck.
Whatever the reason for continuing to draw a paycheck at age 65, here are eight recommended actions that older employees should consider:
1) Watch Your Tax Bracket. Check out the current IRS tax brackets and see where the income breaks are for tax-rate changes. Look at your taxable retirement income from Social Security, pensions and retirement accounts. Understand the impact of employment earnings on your tax bracket. Higher taxes may not drive your employment decisions. But it could make good sense to explore tax-deferred retirement accounts so you can avoid higher taxes and park your earnings until you can withdraw them when your taxable income has declined and you are paying lower rates.
2) Beware of Losing Social Security Dollars. Social Security rules calculate a full retirement age, which is 65 or 66 for most people. If you elect to begin receiving Social Security benefits before your full retirement age (you can start getting benefits when you turn 62), your benefits may be reduced if you also earn outside income.
3) Review Social Security Claiming Decision. If employment earnings reduce your need for Social Security benefits, deferring the date when you begin claiming those benefits may be a smart decision. You are entitled to 100 percent of your benefit when you reach full retirement age. However, for each year you delay, your benefit will rise by 8 percent a year. That's a nice increase, and it's adjusted for inflation as well. The longest you can delay and still get higher benefits is age 70, at which point your benefit will be 132 percent of what it was when you turned 66 (assuming this is your full retirement age). Outside income may also influence the way couples approach Social Security benefits. The Center for Retirement Research at Boston College has a useful Social Security Claiming Guide.
4) Seek Higher Investment Returns. Financial planners Carnathan and DeCarolis both say it may be appropriate for employees of retirement age to build a more growth-oriented investment portfolio if they are continuing to work and earn employment income. They are not subject to as much risk of a stock-market decline as a fixed-income retiree who has no other source of income and doesn't have time to wait for depressed market holdings to recover. However, they stress that asset allocation decisions must reflect a person's risk tolerance. Even "doing the right thing" won't seem that way if it runs counter to your feelings. "You can't make someone do something they don't want to do," DeCarolis says.
5) Keep Employer Healthcare Coverage. "Health care is the big reason my clients don't retire before 65," DeCarolis says. No wonder. Private health insurance for people in their late 50s and early 60s is very expensive, assuming you can find coverage at all. The health reform law will help here but its provisions don't take full effect until 2014. In the meantime, keeping employer health insurance is an important consideration in the work or retire equation. Turning 65 and qualifying for Medicare hardly resolves this issue. Basic Medicare has big coverage gaps. So, if you can retain some form of health insurance along with a paycheck, consider yourself fortunate.
6) Play Catch Up With Retirement Accounts. Tax rules generally allow older employees to park an extra $1,000 in tax-deferred retirement accounts. This is on top of existing annual maximum contributions. Assuming you don't need the current income, plow as much as you can in these tax-deferred accounts. You'll be storing money you will need in retirement, and lowering current taxable income as well.
7) Keep Good Expense Records. Understanding exactly what you spend is great training for retirement and should be part of your retirement planning. Having such a record will make it easy for you to estimate your post-retirement spending needs and whether you will have enough retirement income to live comfortably. In addition, you might be able to deduct certain employment expenses on your taxes. With more and more people telecommuting, home office expenses can be considerable. Also, if you volunteer, there are deductible expenses that can reduce taxable income.
8) Watch Your Cash Flow. Carnathan says a solid cash flow analysis is a fundamental part of a client's retirement thinking. He recommends doing scenarios with different time frames, looking out a year, three years, and five years. This helps clients better understand the merits of continuing to work. Equally important, it moves them into a life transition process. This process is really a more accurate description of retirement than a specific trigger date. "People tend to gravitate toward a specific scenario," he says. "From there, we go on to figure out the best mix of assets" that will support their longer-term income needs.
Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results.