Are you planning on pushing your retirement age out as far as possible, or continuing to work part-time during your retirement years? A growing number of people are following this path, driven partly by enjoyment of their work and partly by economic necessity. In addition, since people are living longer in general, retirement may require planning for 25 years or more of post-retirement income. How would a potentially longer career and lifespan affect your retirement plans?
If you haven't considered how much money you will need in retirement, you should do so without delay. There are a variety of helpful retirement calculators online allowing you to run different scenarios about your income, lifespan, retirement ages, and savings scenarios. Before moving forward, run some numbers to determine your baseline needs and how they will change with respect to a longer life and/or career.
Consider these three major impacts of a longer career/life:
Social Security Effects - Delaying retirement will benefit you significantly, whether you live longer or not. If you plan to work up to at least age 70-1/2, you will end up increasing your monthly benefits through a delayed retirement credit of up to 8%. Conversely, drawing benefits before your full retirement age (FRA) will significantly reduce your benefits, and the monthly effect is magnified over a longer life span.
You can continue to work and draw Social Security benefits, but your benefits may be reduced during the transition period between age 62 and your FRA, which is between 65 and 67 based on when you were born. Upon reaching FRA, you can earn whatever you want without affecting your Social Security benefits, and your benefits are adjusted to restore your portion lost during the work period. See the Social Security website for details.
Medical Coverage - If you are working past the typical retirement age, seek help with www.medicare.gov or your local Social Security office on how to proceed with Medicare. The rules are not always straightforward on how to blend employer insurance coverage with Medicare, and inadvertent cancellations of policies are possible.
Some topics to clarify for your specific work situation: When to sign up for Medicare Plan B, who is the primary and who is the secondary insurer, supplemental insurance needs, and long-term care options. The latter two should match your peace-of-mind factor - chronic medical conditions can drain your savings through out-of-pocket costs not covered by Medicare, and long-term care costs are not covered at all. A longer life may make supplemental health insurance and long-term care insurance more appealing.
Investments and Taxes - For a longer lifespan, it is even more important to contribute all you can to 401(k) and IRA investments. If you can afford it, take advantage of catch-up contributions, as you get closer to retirement age.
Upon retirement, you want some form of income-generating investment, such as dividends from investments, an IRA, or 401(k) requiring minimum distributions, or an annuity. Your goal at this point is to have a steady stream of income while minimizing your taxes as much as possible. Consider a Roth IRA if you meet the requirements and can afford an up-front tax hit. You do not have to take minimum distributions during your lifetime, making it a reserve source of income if your traditional IRA and 401(k) drains out.
The amount of taxes you pay on your Social Security benefits depends on the income you make. Benefits are tax-free below $25,000 total income ($32,000 for married filing jointly); 50% of benefits are taxable up to $34,000, and 85% of benefits are taxable thereafter.
The trick is to balance income from all sources to minimize the Social Security tax as well as the overall tax bracket where you will fall. Consult a professional for assistance if needed.
You can prevent a longer lifespan from causing potential financial problems by setting aside more for retirement or delaying its start, but seek help from the Social Security office and financial professionals to help guide you. Your situation may vary greatly depending on how you plan to continue your career (or start another) beyond typical retirement age and it's very difficult to keep track of all the rules by yourself.
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