Not Ready to Retire
Please note: This article may contain outdated information about RMDs and retirement accounts due to the SECURE Act, a new law governing retirement savings. The SECURE Act may impact investors nearing- or in retirement, new parents, small business owners and employees. For more information about the SECURE Act, please read this article or speak with your financial consultant.
I’m turning 65 and am still working. I have no immediate plans to retire, but I’m wondering what I need to know as I navigate through this transition over the next few years.
Your question raises very important issues. As workers, we Baby Boomers have spent decades building our nest eggs. But as we think about winding down our careers, many of the old rules and time frames for “retirement” don’t apply. Personally, I have to look no further than my friends, colleagues and family. Our needs and wishes are as diverse as we are, and most of us aren’t contemplating a hard stop at age 65. In fact, those of us who are the most fortunate plan to continue working well into our late 60s or 70s.
Personal fulfillment aside, working longer provides indisputable financial advantages: more money and less time to spend it. But because our financial system is largely designed for retirement in our 60s, we have to keep a few things in mind.
Wait to file for Social Security
One of the most common mistakes people make is filing for Social Security benefits too soon. In fact, the term “full retirement age” (FRA) is misleading because in general, your benefits will continue to increase well past that date—until age 70. So before you leap on board, understand the math. Your monthly benefit will generally increase between 5–7% for every year you delay from age 62 to your FRA. And it will continue to increase 8% between your FRA and age 70. In other words, if you’re healthy and longevity runs in your family, you stand a good chance of increasing your lifetime benefit by postponing your start date.
Enroll in Medicare Part A
If you’ve already filed for Social Security, you will be automatically enrolled in Medicare Parts A and B when you turn 65. But if you’ve followed the advice above, and you haven’t filed for Social Security, you have a choice to make.
Most people benefit by enrolling in Medicare Part A at age 65, whether or not they continue to work. There are no premiums, and enrolling now will help you avoid potential penalties or delays down the road. If you’re covered by your employer’s plan and your company has 20 or more employees, that plan will remain your primary coverage. If you work for a company with fewer than 20 employees, Medicare will be your primary insurer.
Medicare Parts B and D are another matter. Both have high-income premium surcharges, so you may be better off sticking with your employer plan. Once you leave your job, you have eight months to enroll in Part B, or face a penalty. Medicare Part D also has a late enrollment penalty if you go more than 63 days without prescription drug coverage.
Medicare and HSAs don’t mix
Many people don’t understand that once you enroll in Medicare, you’re no longer eligible to contribute to a health savings account (HSA). Therefore, if you’re relying on your HSA to boost your savings, you’ll need to postpone Medicare.
Continue to sock away for retirement
No one should ever, ever walk away from their employer’s 401(k) match. That’s clear. But beyond that, you may be wondering how long you should continue funneling money to your retirement accounts and how much you should contribute each month. The good news is that as long as you’re working, you can continue to contribute the legal maximum ($24,000 in 2015) to your 401(k) regardless of your age. If you anticipate being in a high tax bracket come retirement, you might want to consider using a Roth 401(k) if one is available.
Once you reach 70½, you can no longer contribute to a traditional IRA. Roth IRAs don’t have an age limit, but they are restricted to those who earn less than $193,000 (married) or $131,000 (single).
On the other side of the equation, earning a paycheck can also help you delay having to take required minimum distributions (RMDs) from your 401(k). As long as you’re working (and you don’t own more than 5% of the company), that requirement is waived until April 1 following the year that you retire. You will, however, have to take RMDs from your traditional IRAs and from 401k/403b plans linked to former jobs once you hit 70½. There is no such requirement for a Roth IRA.
Should you pay off your mortgage?
Conventional wisdom is that we should pay off our mortgages by the time we leave the workforce. This is an understandable way of looking at it, especially if you want to simplify your life and rein in your expenses. However, it’s important to look at your mortgage in the context of your complete financial profile. A low-interest, tax-deductible fixed loan may not be such a bad thing for those who can count on a reliable pension or other income. So before you rush to pay off your mortgage, especially if that involves selling securities or reducing your liquidity, I advise you to consult with your financial advisor and think through your options.
Turn your portfolio into your paycheck
Switching from being a saver to a spender can be a difficult transition. After socking away your savings for decades, it can be unsettling to be on the other side, depleting what you’ve worked so hard to achieve. This discomfort is so universal that my advice to anyone approaching this transition is to take it slowly and create a safety net.
Before you stop working, review your net worth statement so that you understand exactly where you stand. Make a retirement budget and stash away a minimum of a year’s worth of cash. Review your portfolio to make sure you have the appropriate balance of risk and safety. And consult your financial advisor to create the most tax-efficient draw-down strategy.
We Boomers have never been ones to blindly follow the rules. But it’s important to understand what the various systems expect and require. That way, we can navigate our own futures and continue to live life to the fullest!