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Retirement Tip of the Month
Many Americans choose to continue working to some extent during their retirement. It may seem counterintuitive, but remember: if you’re generally healthy and suffer from no chronic illnesses, your life expectancy could be as high as 92+ years. So many retirees who only planned for a 20+ year retirement may need to reconsider their financial strategy.
Although it might take away from the time you have to travel or enjoy other retirement hobbies, there are quite a few benefits to continuing work during retirement. A retirement job may allow you to delay dipping into your savings. This, in turn, may give you more time to save up for retirement. In the case of some types of retirement plan accounts, older workers are eligible to contribute more money than younger people. Furthermore, assuming you’re past full retirement age, you may be able to begin taking Social Security benefits while also receiving income from work. Or, you may want to delay taking Social Security in order to get more out of it later on.
Today, we’re going to dive into a list of reasons why you may want to consider continuing work in retirement. In order to make the most of your retirement job, you should:
Delay 401(k) Withdrawals
Traditional 401(k) and IRA distributions are typically required after age 72, and income tax is due on each withdrawal. These are known as required minimum distributions (RMDs). However, if you continue working past age 72 and don’t own 5% or more of the company you work for, you might be able to continue to defer withdrawals from your plan, and the resulting tax bill, until April 1st of the year you retire. You will still need to take RMDs from IRA and 401(k) plans from previous employers.
Make Catch-Up Contributions
Workers aged 50+ are eligible to make “catch-up” contributions to their retirement accounts, and qualify for a bigger tax deduction. Older employees can save up to $75,000 more than younger employees, totaling a $30,500, in their 4o1(k) plan account. Making a $7,500 catch-up contribution to a 401(k) plan could save you up to $1,800 in taxes if you are in the 24% tax bracket. IRAs also allow older workers to make catch-up contributions worth an additional $1,000 per-year.
Boost Your Social Security Earnings
Social Security payments are calculated based on the 35 years during which you earned the most. If you earn a higher salary now than you did earlier in your career, you could boost your Social Security payments going forward. If you file for benefits and then continue to work or get a retirement job, those earnings will result in a recomputation as long as they replace one of the years of earnings in the 35-year calculation. This strategy is especially useful if you haven’t yet worked for 35 years and have had one or more zero-earning years factored into your benefit calculation. The Social Security Administration will automatically adjust your benefit if your additional earned income qualifies you for higher Social Security payments.
Consider Delaying Your Social Security Payments
If you continue to work into your 60s and earn enough to pay the bills, you may be able to delay Social Security benefits. We’d recommend this, as monthly benefit payments are increased for each month you wait to start collecting benefits. In other words, the longer you wait, the better the benefits later down the line. This caps at age 70, however, so you should begin taking benefits by then. These higher payments last for the rest of your life, and can be passed on to a surviving spouse who gets a lower payment. Your Social Security statement gives you a personalized estimate of how much you will receive if you begin Social Security payments at various different ages.
Don’t Forget to Sign Up For Medicare, But Watch Out For Higher Medicare Premiums
You become eligible for Medicare starting at age 65, regardless of employment status. Remember to sign up for Medicare during the seven-month initial enrollment period. This window begins three months before the month you turn 65, and ends 3 months after that month. The government adds a late enrollment penalty to your Medicare Part B and D premiums if you sign up too late. And, unfortunately, the higher premiums for late enrollment will last for the rest of your life. If you continue working after reaching age 65 and receive group health insurance through your employer, you will need to sign up for Medicare within eight months of leaving the job or the health plan in order to avoid the penalty.
However, having a retirement job could result in more expensive Medicare premiums. If you earn more than $103,000 ($206,000 if you’re married), you will have to pay higher monthly rates for both Medicare Part B and D. For 2024, your costs for Medicare Parts B and D are based on the income of your 2022 tax return.
Find a Better Work/Life Balance
Obviously, few retirees want to keep working full-time. You may be able to gradually reduce your hours at your current job and phase into retirement. Or, sometimes retirees take a break to relax for a while before getting a new part-time retirement job. Most older workers want a more flexible schedule in order to properly enjoy their retirement. Or, you may be able to find a temporary or seasonal job. This could allow you to earn income while also giving you far more time to enjoy your hobbies and spend time with loved ones. Additionally, many jobs now allow you to work from home.
Learn more about the benefits of working into retirement here.
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