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Should You Put Retirement on Hold?

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SOCIAL SECURITY DISABILITY
AP File

One indicator that our economy is still hurting is that more and more people are postponing retirement. According to the Department of Labor, the number of people over 55 still working has increased steadily since the recession began -- 28.9 million at last count -- and some surveys show more than a third of employees expect to work past age 70 or never retire.

A perfect storm of negative factors has forced many people into this position:
  • They've had to tap retirement savings early to cover bills or tide them through unemployment -- just when retirement account values had been decimated by the market crash.
  • Plunging home values have diminished or erased the equity many had hoped to draw on in retirement.
  • They're unable to afford -- or qualify for -- health insurance they'll need until Medicare kicks in.
  • And many boomer parents have put their own savings on hold while helping their kids struggle through the recession.

If you're hoping to retire in the next few years, consider the following:

How much will you need?
Financial planners often suggest people may need 70 percent or more of pre-retirement income to maintain their current lifestyle, but it's difficult to generalize. For example, some people downsize housing or retire to less expensive areas and thus need less. Others can expect increased medical, utility and other bills to outpace earnings on their savings.

Crunch the numbers. Start estimating your retirement needs by using online calculators, including:
  • Social Security's Retirement Estimator, which automatically enters your own earnings information from its records to estimate your projected Social Security benefits under different scenarios, such as age at retirement, future earnings projections, etc. You can also download a more detailed calculator to make more precise estimates.
  • Check whether your 401(k) plan administrator's website has a calculator to estimate how much you will accumulate under various contribution and investment scenarios. If not, try Bankrate.com's 401(k) calculator, or their other calculators for estimating monthly retirement income, retirement shortfall and more.
  • AARP offers a retirement calculator to help determine your current financial status and what you'll need to save to meet your retirement needs.

Consult a professional. After you've explored various retirement scenarios, consider paying a financial planner to help work out an investment and savings game plan. If you don't have a personal referral, good resources include the Certified Financial Planner Board of Standards, the National Association of Personal Financial Advisors and the Financial Planning Association.

Social Security issues. To make ends meet, many people begin drawing reduced benefits from Social Security before reaching full retirement age (65 for those born before 1938 and gradually increasing to 67 thereafter). This can have several financial consequences:
  • Your monthly benefit will be reduced by up to 30 percent. (Conversely, if you postpone benefits until after reaching full retirement age, your benefit increases by 7 to 8 percent per year, up to age 70.)
  • Although many states don't tax Social Security benefits, they are counted as taxable income by the federal government. So, depending on your overall income, you could owe federal tax on a portion of your benefit. IRS Publication 915 has full details.

If you begin drawing Social Security while still working, your benefit could be significantly reduced depending on your income. Read How Work Affects Your Benefits for more details. Rest assured, however: Those reductions aren't truly lost since your benefit will be recalculated upward once you reach full retirement age.

If you're still working when you begin drawing Social Security, your benefit could be significantly reduced. The benefit reduction formula is rather complicated and depends of whether your income exceeds certain levels as well as on when you reach full retirement age.

Other tax implications. Even if your income drops significantly after retirement, chances are you'll still be taxed on a portion of it, including withdrawals from regular IRAs and 401(k) plans. And, depending on where you choose to retire and your income sources, you'll probably also face additional taxes on everyday purchases, real estate, capital gains, inheritances -- the list goes on.

The Retirement Living Information Center features breakdowns of the various kinds of taxes seniors are likely to pay, state by state, including taxes on income, sales, fuel, property, inheritances and other items. For more on taxes in retirement, read my previous blog, "Taxes Follow You Into Retirement."

One last suggestion: Once you've settled on what you think will be a sufficient retirement budget, try living on it for a few months first before retiring to make sure it actually works.

This article is intended to provide general information and should not be considered legal, tax or financial advice. It's always a good idea to consult a legal, tax or financial advisor for specific information on how certain laws apply to you and about your individual financial situation.

Follow Jason Alderman on Twitter: http://twitter.com/PracticalMoney

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