Continuing to Work Into Your 70s?
Older Americans have been continuing to work past the traditional retirement age. This trend is a result of a few things. Either because they can’t afford to retire sooner, an unfortunate risk many face, or by choice, as there are actually several benefits it comes with. Today, we’ll discuss some of the benefits of working into your 70s. If you’re open to the idea, continuing work late into life may be worth considering.
The primary reason that many workers are practicing this strategy is better health later in life. Recently, COVID-19 notwithstanding, older workers are healthier than they’ve been in the past. People are healthier for longer, and as a result, are able to work for longer.
Although, this trend is also due to the growing need to increase retirement savings. “We’re getting into the generations of people who didn’t have pensions, unless they were in the public sector.” This matters for two primary reasons. First, the way pensions operated when they were still used, was that there was a built-in retirement age, either a mandatory or at least strongly-suggested date. Second, people tend to work longer to save for longer, as they’re more worried about the possibility of running out of 401(k) savings in retirement. This is a fear that wouldn’t be prevalent if pensions weren’t now disappearing.
Additionally, many Americans who have continued to work into their 70s have claimed it helps keep them feeling young, keeps their minds sharp, and provides opportunities to socialize. And that’s something that becomes less common after retiring.
Required Minimum Distributions
RMDs (Required Minimum Distributions) are government-mandated withdrawals of a certain amount from your retirement accounts. This applies to most retirement plan accounts, with the exception of Roth IRAs. Retirees must begin making withdrawals at age 70 1/2. Unless, that is, you’re still working at that age.
If you’re still in the workforce at age 70 1/2 and own no more than 5% of the company you work for, you instead have to begin RMDs in the year you retire, rather than 70 1/2. Delaying RMDs may help if you don’t have as much money saved for retirement as you’d like to. This is because it enables you to keep your existing savings in your retirement account, where they can continue growing for longer. You can withdraw only as much as you need, rather than the government-mandated withdrawal amount, which may be more than what you want to remove.
Although, it’s important to remember that when you finally retire, RMDs will be higher, a consequence of your higher account balance. And, whatever you do, don’t forget about your RMDs once you are required to start taking them. Failing to withdraw the required amount results in a 50% penalty on the extra you should’ve withdrawn. It’s ultimately better to take the money out and pay taxes on it than have half of it taken away by the government. So, don’t forget about your RMDs.
Social Security Benefits
If you continue working for longer, it also enables you to delay claiming your Social Security benefit. This can have significant financial advantages. Basically, each month you wait to claim Social Security benefits after turning 62 will result in a bigger monthly check. “Every year you delay, that’s a raise you’re giving yourself forever.”
However, remember that this feature maxes out after age 70. After you’ve turned 70, you’re now eligible for the maximum benefit per check, an amount which varies based on certain factors. Delaying benefits beyond age 70 doesn’t have any additional benefit, it’s just costing you money. So, make sure to start claiming benefits at that point.
You can begin Social Security even if you’re still working. You can apply for Social Security over the phone, online at ssa.gov, or by visiting your local Social Security office. Make sure you know your Social Security number and have a copy of your W-2 from the previous year. Additionally, make sure to bring your birth certificate and proof of citizenship if you weren’t born in the United States.
There are some negative tax implications to continuing to work into your 70s. You see, many retirees expect that they’ll end up spending less money as they age, even believing they’ll be in a lower tax bracket. But, this may not be true if you continue work, while also drawing upon your Social Security benefits or retirement savings at the same time. You’ll owe taxes on the income you earn via working, and any money you withdraw from tax-deferred retirement accounts, and taxes on up to 85% of your Social Security benefits if your income exceeds $25,000 ($32,000 for a married couple). This could result in a higher tax bill than you anticipated. And if you don’t touch your retirement savings until you’ve left the workforce, you’ll have larger RMDs when you retire. This could force you to withdraw more money than you intended from your retirement accounts each year, also raising your taxes.
While all of this is still something to be wary of, you’ll (probably) still largely come out ahead if you continue work, especially if you got a late start on your retirement savings and are worried about the possibility of running out of money.
“Working over 70 can have several benefits, but there are also potential tax drawbacks. You also need to understand how your age affects your Social Security benefits so you don’t miss out on a valuable supplementary source of income that could help you cover your expenses.”
Some Work May Be More Difficult
Whether or not continuing work late into your life is even doable depends on the responsibilities that your profession includes. Many jobs require physical labor which becomes more difficult for workers to perform as they age. “If you’re a blue-collar worker, working in your late 60s may not be feasible, physically.”
Regardless of whether you intend to keep working into your 70s, we can offer strategies that can help you protect your savings and earn a reasonable rate of return** on them. Reach out to American Principal to learn more. We’re always here to help.