Continue to Work Into Your 70s?
An increasing quantity of older Americans have been continuing work past the traditional retirement age. This is either because they can’t afford to retire sooner, an unfortunate possibility many suffer from, or by choice. It does actually come with some benefits if you decide to continue working into your 70s. Today, we’ll discuss some possible reasons why you may want to do this.
The primary reason people have been working longer is better health later in life. Recently, despite COVID-19, older workers have been healthier than they used to be. People are healthier longer, and as a result, are able to work longer. However, this trend also results from 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,” and that matters for two main reasons. First, the way pensions used to operate was that there was a built-in retirement age, either a mandatory or strongly-suggested date. And second, people tend to work longer to save for longer, as they’re more worried about running out of 401(k) savings in retirement, a fear that wouldn’t be prevalent if pensions weren’t now fading out.
Furthermore, many older Americans who’ve continued to work into their 70s have claimed it helps their minds stay sharp, keeps them feeling young, and provides opportunities to socialize, which is often rare in retirement.
Social Security Benefits and Working Past 70
Remaining in the workforce longer also enables you to delay claiming your Social Security benefit. This can have a significant financial advantage. You see, each month you wait to claim after turning 62 will result in a bigger monthly Social Security check. “Every year you delay, that’s a raise you’re giving yourself forever.” However, remember this feature maxes out at age 70. After you turn 70, you’re eligible for the maximum benefit per check. Delaying benefits beyond this point is just costing you money. So make sure to start them at that point.
You can begin Social Security even if you’re still working if you want to. You can apply for Social Security online at ssa.gov, over the phone, or by visiting your local Social Security office. Make sure you have your Social Security number and a copy of your W-2 from the previous year. Furthermore, make sure to bring your birth certificate and proof of citizenship if you weren’t born in the U.S.
The Impact on Required Minimum Distributions
Required Minimum Distributions, or RMDs, are government-mandated withdrawals of a certain amount from your retirement plan accounts. This applies to most retirement plan accounts, except for Roth IRAs. Retirees must begin making withdrawals at age 70 1/2. But, if you’re still working at that age, you can delay RMDs on some plans, like 401(k)s. Basically, if you’re still in the workforce and own 5% or less 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 saved for retirement as you want. It enables you to keep your existing savings in your retirement account, where they can grow for longer. You can withdraw only as much as you need, rather than the government-mandated amount, which might be more than what you want to remove. But, when you finally do retire, RMDs will be higher, a consequence of your account balance being higher. And, whatever you do, don’t forget about your RMDs and skip them once you are required to start taking them. Failing to withdraw the required amount will result in a 50% penalty on the money you should’ve withdrawn. It’s ultimately better to take the money out and pay the taxes on it than have half of it taken away by the government.
Tax Implications
There are some negative tax implications to be wary of if you continue to work past age 70. You see, most people expect that they’ll end up spending less money as they age. Maybe they’ll be in a lower tax bracket. But, this may not be true if you continue work, while also drawing upon your retirement savings or Social Security benefits at the same time. You may, in fact, end up in a higher tax bracket.
In this scenario, you’ll owe taxes on your employment income, any money you withdraw from tax-deferred retirement accounts, and taxes on up to 85% of your Social Security benefits, assuming your income exceeds $25,000 (for a single individual, the amount is $32,000 for a married couple). This could result in a higher tax bill than what you expected.
If you don’t touch your retirement savings until you do retire, you’ll have larger RMDs. This could force you to withdraw more money than you originally intended from your retirement plan accounts each year, in turn raising your taxes. While this is something you need to be aware of, you’ll probably still come out ahead if you continue to work, especially if you got a late start on your retirement savings and are worried about 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 Jobs May Be More Difficult
The opportunity to continue working into your 70s often depends on the responsibilities that your job includes. Many occupations require physical labor which becomes increasingly difficult for workers to continue as they age. “If you’re a blue-collar worker, working in your late 60s may not be feasible, physically.”
Regardless of whether you want to keep working into your 70s (hopefully not because you need to) or not, we have strategies to help you keep your savings protected and earn a reasonable rate of return** on them. Reach out to us here at Retallick Financial Group to learn more. We’re always here to help.
Sources: AARP, The Motley Foolm
