Should You Put Retirement on Hold?

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

 

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

Comments

[Robert-Eldridge]

08:49 PM on 09/05/2011

There are some guaranteed products like Fixed and Fixed Indexed Annuities. No client has ever lost money. If they still have money in 401K's, it is a matter of when they want to take some money off of the table.

[noaxe397]

01:11 PM on 09/05/2011

After 9/11, AARP took a poll that revealed 45% of people responding either delayed retirement or returned to work because their 401ks were no longer sufficient to support them. My question for the author is: why do you start with the age of 55 for retirement and say a multitude of factors have forced people into this decision (to work after 55 I presume.) Since when is 55 anywhere close to the retirement age for working Americans?

[redscarecrow]

12:54 PM on 09/05/2011

Retirement-something that very soon only the very rich will be able to afford.

[mjk0259]

10:01 AM on 09/05/2011

I've noticed a lot of stores are putting covers over their dumpsters now so you can't get food out of them. That was my retirement plan. This should be illegal.

[dporterdvd]

08:45 PM on 09/04/2011

According to the article, one third of all employees plan to work to age 70 or later.

It's an admirable plan but I hope their bodies co-operate and do not wear out before age 70, especially since most employers are forcing employees to work harder and longer for less pay and fewer benefits.

What happens to elder Americans who can't keep up in the workplace because their bodies have deteriorated too much to compete with younger workers?

[sunflower12]

07:56 PM on 09/04/2011

The scenario is sad. Many people over 55 are not healthy enough to look for jobs, and, who knows if they would be lucky to find one.
I hope things get better really soon. As a nation, we should try to find solutions for the fact that people are living longer. Sometimes people want to continue to work, they cannot face 20 or 30 years of their lives without working, even if they can afford it.
The problem is complex, and, in a bad economy, tends only to get worse.
Individual solutions are good, but the problem is too big to be ignored by government and society.

[JBS]

04:45 PM on 09/04/2011

Are you going to be allowed the choice?

Try getting laid off at age 60 & see how many job offers you can find.

[hypnotoad72]

08:16 AM on 09/04/2011

If fair-paying jobs are there, then nobody need worry.  I like to learn, grow, and be useful.  It's only fair...

[spinotter11]

08:49 PM on 09/04/2011

You seem to be channeling an alternate reality in which things are fair. Very distant from our current economic situation, and from anything else in this universe.

[BklynDame]

10:18 AM on 09/05/2011

Exactly right. And, in many cases, it's not even about having a fair-paying job available; many employers do not want to hire anyone above the age of 45 because they're considered 'mid-career' people commanding the highest salaries and benefits. We're now at a stage where anyone above that age is considered 'old' in corporate America.

[Transit]

02:19 AM on 09/04/2011

Isn't it interesting that the hoot'n and holler'n about how much the Baby Boomers are going to drag down Social Security by 2037 is just about the time the last of them has died off.

[Shona Ross]

12:33 AM on 09/04/2011

Hell, at the moment,health care threatens to grow to consume the entire economy of not just the United States, but most of the developed world. If you want to use your go to example of Europe, they too face rising health care costs. Check our "Penny Health" to read articles on how to save money on health insurance.

[RealistBC]

09:02 PM on 09/03/2011

I was 26 when Reagan was elected. All the talk that erupted then about how Social Security was not going to cover its obligations got my attention. But as the "discussion" steered away from logical things like raising the income limit of taxation to cover the shortfall convinced me at that age that I was never destined to retire. It was just one more thing that the from half of the Baby Boom will have used up before I could get my share.

[Welshish]

11:04 PM on 09/03/2011

The baby boomers have been paying in all these years! The SS fund had so much money in it that our government decided to borrow it and put it in the general fund. THAT's why the money isn't there. Nobody took your share.

[Transit]

02:09 AM on 09/04/2011

That's not exactly true. The spending for Social Security is by law mandatory which means the benefits go out even if the money must be borrowed. If there are not enough Social Security taxes collect to cover the benefits for any given year (2010 was the first time this happened) the difference is taken out of the Social Security Fund which current has nearly 2.5 trillion dollars in government bonds drawing interest. The interest alone from this fund exceed what was needed to cover the deficit in 2010.

So even with the "Baby Boomers" going into retirement there is enough money in the Social Security Fund to cover everyone at least through 2037 at the current rate. After that the last of the Baby Boomers will have died anyway so they won't be a problem anymore.

[Scholastica8]

03:43 PM on 09/03/2011

In countless cases, retirement has not been a choice. By that I don't mean that there is no choice but to continue working. I mean that retirement has been involuntary and forced upon people who were a decade away from Social Security and retirement.

Not only have they been forced to quit saving, they are have lost homes to foreclosure and are spending thru their retirement savings. Once they have run through their 99 weeks of unemployment, they can try to get on Disablity, but that is increasingly not an option. Therefore, they have no income other than savings. Once that is gone, there is no option but County Aid for the Indigent.

Not only that, but because they are no longer contributing to Social Security, their benefit amounts will be lower than they expected whether they take SS at age 62 or wait until their full age.

Many of these people will soon become homeless or move in with grown children or other relatives. They may be picking up occasional cash work or even be collecting cans and bottles to get by. They may be living in cars or campers. Many will not live to collect SS, because if they have 5-10 years to go, they won't have the savings. If they have no family support, depression and poverty will set in. A poor, elderly person w/o support always has a final option. We all know that. That option will increasingly be taken.

[spinotter11]

08:54 PM on 09/04/2011

And it may be the best option under the circumstances. O tempora o mores.

[been2there]

02:46 PM on 09/03/2011

Should You Put Retirement on Hold?
Like I am going to have a choice?