Full retirement age is now 66 or 67, depending on the year you were born. But a recent survey revealed that one in four workers don’t plan to retire until after their 70th birthday. While some people may choose to work longer out of a desire to stay active, others may have to do so in order to keep up with their expenses. If you’re thinking about putting off your retirement, here’s a look at some of the pros and cons of working until age 70.
Pro: Working Longer May Be Good for Your Health
Getting older takes a toll on you physically. But according to one study, working longer could extend your life span. Researchers at Oregon State University found that putting retirement off for just one year after turning 65 could reduce the risk of dying by 11%.
Sticking with the 9-to-5 until age 70 doesn’t mean you’ll live forever. But it could give you more time to enjoy your golden years.
Pro: You Can Squeeze More Money Out of Social Security
With Social Security, you can get more bang for your buck by waiting until age 70 to begin drawing your benefits. If your normal retirement age is 66 but you wait until you turn 70 to start taking your Social Security benefits, you could receive 132% of the monthly amount you’re eligible for. That’s a nice financial incentive for working a little longer.
Pro: You Can Continue Growing Your Nest Egg
Working until age 70 could be a smart move if you want to add more money to your retirement fund. If you have a 401(k), for example, you could continue making contributions up to the annual limit, along with catch-up contributions while you’re employed. You could also defer triggering required minimum distributions from an employer-sponsored plan.
If you’ve got a traditional IRA, you can make new contributions until age 70 1/2. At that point, the required minimum distribution rule would kick in. With a Roth IRA, however, you have the advantage of being able to save indefinitely.
Con: Your Savings May Still Come Up Short
Continuing to earn a paycheck may help you out if you want to save more for retirement. But it may not do you any good if you end up having to spend a lot of money to counter a rising cost of living. Healthcare expenses in particular can take a big bite out of your savings.
The Bureau of Labor Statistics estimates that the average 65 to 74-year-old spends 12.2% of their income on healthcare each year. By the time they turn 75, medical expenses eat up nearly 16% of their income. At the same time, housing costs also creep up, moving from 32.4% of income in the late 60s and early 70s to almost 37% by age 75 and beyond.
Working longer also doesn’t counter the effects of inflation. When inflation rises, it has the ability to significantly erode retirement savings. According to one report, retirees can lose as much as $94,770 over the course of a 20-year period if the annual inflation rate is 2.5%.
The Bottom Line
If you’re on the fence about whether you should work until you turn 70, weighing the advantages and disadvantages of delaying your retirement can guide you toward making the decision that’s best for you. Remember that while having extra income can certainly be helpful, you’ll have less time to enjoy your retirement.
A question which often arises among those who are thinking about retirement is, “Will my Social Security income be taxed?” Generally speaking, the answer to this question is yes; however, there are deviations from this. Previously, Social Security income was not taxable. But things have changed. Everyone drawing Social Security gets 15% of their benefits tax-free. After this percentage, things change. If you rely exclusively on Social Security for your income, your entire benefits should be non-taxable. However, if you fall in the bracket of people who receive income from other outlets such as a 401(k), a pension, or a part time job, you are receiving more than the Social Security Administration limit allows for tax free-benefits and therefore up to 85% of your Social Security could be taxed.
IRS Income Limits:
As of 2015, the IRS limits for configuring tax liability of your Social Security income are as follows:
A person filing individually with a combined income (your Adjusted Gross Income + Nontaxable Interest + 1/2 of your Social Security benefits.) within the financial bracket of $25,000-$35,000 must pay income tax on up to 50% of their Social Security benefits. If an individual has a combined income of $34,000 or more, they will be required to pay income tax on 85% of the Social Security benefits.
For married couples who are filing together, if their combined income is between $32,000 and $44,000, they will be required to pay taxes on up to 50% of their benefits. If, however, their combined income is more than $44,000, they must pay taxes on 85% of the Social Security.
As of right now, no one pays taxes on more than 85% of their Social Security benefits no matter their financial bracket.
The monthly Social Security check averages around $1,294. This is an annual income of approximately $15,528. If your benefits are near average and this is your sole income, you will not have to pay any taxes on your Social Security. If you are not sure about your Social Security income you can consult form SSA-1099 for a summary of your benefits.
Federal Taxes on Social Security Income:
For those who have figured out that they will need to pay taxes on their Social Security, the tax rate is the same as regular income. To break it down, for every dollar over $25,000 that an individual makes, $.50 of their Social Security benefits could be subject to federal taxation. This number rises to $.85 when an individual claims an income over $34,000.
If 50% of your benefits are subject to taxation, the amount you include in your taxable income will be the lesser of either (a) half of your annual benefits or (b) half of the difference between your combined income and IRS threshold. However, if you figure out that 85% of your benefits are subject to taxation, things can get even more complicated. In order to help you better understand the tax liability on your Social Security, it is advisable to check into the worksheet and e-file software provided by the IRS. These sheets will help you to better calculate and understand your income tax.
The Impact of Roth IRAs:
Based upon the information above, you may be a little concerned about the taxes you will have to pay once you are in retirement. If this is the case, you might consider saving your money in a Roth IRA. With this type of IRA, you save after taxes. With a traditional IRA you will be required to take Required Minimum Distribution; however, with a Roth you have already paid the taxes on that money.
Because of this, a Roth IRA will not add to your provisional income; therefore, such an account will allow to draw additional income without going over the IRS threshold concerning Social Security.
You Can Make Social Security Taxes a little Simpler:
There are ways to avoid the shock of paying a large amount of taxes in one large lump. First, you can ask the Social Security Administration to withhold taxes from checks. This is simply done by submitting a IRS W-4V form. Second, you can pay your taxes on quarterly basis just like you would taxable investments.
State Taxes on Social Security Benefits:
Another question you may be asking concerning Social Security is how it works with state taxes. Will you have to pay state taxes based upon your Social Security income? This is a rather complicated question due to varying rules throughout the 50 states and the fact that some states offer exemptions and credits based upon age or income.
A majority of States exempt some Social Security income from their taxes, while states such as Alaska do not tax income at all. However, there are a handful of states which tax Social Society benefits to the extent that they are at the federal level. The best way to know the specifics concerning state tax is to check with your local authorities. As with federal taxes, if Social Security is your only source of income, you are exempt from paying taxes on your benefits
Although none of us enjoy paying taxes, there is a bright side: if you are having to pay taxes on your retirement, this means you are doing well. You are receiving income from other outlets
and not relying solely on your Social Security. Even though you may have to pay some taxes, having other financial outlets outside Social Security will provide more security in the long run.
Saving for retirement is an essential link in the wealth-building chain. Taking in to account the need to save for the future while you are still young will help you avoid many headaches as time progresses. There are numerous rules out there which are said to be crucial for helping you retire successfully. However, some of these rules could potentially be deviated from and result in positive effects in regards to your retirement.
Rule #1 It is Vital to pay off your Mortgage before you Retire
It seems logical to believe that if you plan to reside in the same home after retirement, you should attempt to completely pay off your mortgage beforehand. By doing so, it is assumed that you will have less expenses taken out of your monthly budget. Nevertheless, the extra cash you presumed you would have after the mortgage was paid off may have to go towards other expenses. Without your mortgage, you are no longer eligible for mortgage interest deduction at tax time. If this deduction is gone and you do not have other deductions which can be itemized, you may find yourself paying more taxes than originally thought. This is especially true if you plan for your tax bracket to increase during retirement.
Rule #2 You should Completely Pay off your Debts before Saving
The majority of people who earn a college degree obtain a large debt. As a matter of fact, in 2013, 70% of college students had massive students loans. These loans are something which can potentially hang over your head years after you have left college. Therefore, it stands to reason that ridding yourself of that debt should be a number one priority, even over saving for your retirement. After all, the sooner you pay off the debt, the sooner you can start saving, right?
While it may seem like a good idea to pay off your debt sooner by paying more than the monthly amount owed, this could potentially hurt you in the future. For example, if a college graduate is presently making $40,000 annually and owes approximately $25,000 in student loans, they will need to pay $280 monthly to rid themselves of this debt in 10 years. If their interest rate is 6%, the grand total paid toward their loans will be $33,000. It would seem logical that if an extra $50 per month is paid, you could cut that time down and save almost $2,000 in interest. Thinking about the savings, that seems great.
Hypothetically, if instead that extra $50 was put towards a 401(k), after 40 years, a person would have a grand total of $80,000 saved for retirement. If you decide to wait until your college debt is completely paid off, you will significantly cut down on the money you have saved for your future retirement.
*The hypothetical examples above are not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.
Rule #3 A person should save approximately $1 million in order to retire comfortably:
Becoming a millionaire in retirement sounds amazing and many experts say this is the goal to which you should strive. However, the problem with simply striving for a general number is that it doesn’t take into account what you personally will need for retirement. For some people this number would be an abundant amount, but it all depends on the individuals and specific factors which will play into their retirement life.
Things to look at when attempting to set a goal for your retirement fund are factors such as where you want to live, if you will rent or own, your anticipated medical bills, how much you are expecting to receive from Social Security. Analyzing these factors will better help you decide upon a retirement goal that is in line with your future plans.
One Rule to Always Follow:
Although there are some rules concerning saving for retirement which are not concrete, there is one which always remains true. A retirement fund is not something you invest in once, it is something you must commit to invest in on a regular basis. Setting aside a specific amount of money consistently will work toward helping you to create a more financially secure retirement.
*The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. Investing involves risk including loss of principal. No strategy assures success or protects against loss.
Full retirement is not as common as it used to be. Many adults now reaching retirement age are choosing to do what is termed worktirement. Put simply, instead of leaving the work force entirely, many people over 60 are choosing to continue to work, at least part time. Although this is sadly mandatory for some seniors as their Social Security and IRA or 401(k) do not provide sufficient income, for others, it is simply a great way to stay active while also providing an additional income outlet.
Because of the increase in those considering worktirement, SmartAsset recently conducted research on nearly 500 of the largest cities in the US to discover the best locations for worktirement. Within the bounds of this research, ten separate metrics were used including data from their “Best Places to Retire” study and four metrics used to gauge the job market seniors face in each city. Information concerning unemployment rates among senior seeking a job, the average annual housing costs, and the number of doctor’s offices per 1,000 residents were also examined for each city. Each city was then assigned a score from 0-100 based upon its performance across the ten metrics.
As a result, several key findings were discovered:
- South Dakota rates very high. Two of its largest cities can be found within the top ten list. This is due to the states booming job market and senior-friendly tax environment.
- America’s interior dominated the high rankings on this list. Three Texas cities fell in the top ten category (and six fell in the top 15). Additionally, like South Dakota, two Tennessee cities also made the top 10 list.
- Low taxes were a key factor in the gravitation of retirees. Many of the top cities were income-tax-free states. This could partially be due to the fact that more retirees results in the development of more infrastructure and amenities to support retirees.
- California is not the greatest place for retirees. Although this state is home to approximately 12% of the US population, high housing costs and taxes pushed them lower on the list.
Below are the top 10 cities for those considering worktirement:
- Rapid City, South Dakota
Because of its wonderful location on the eastern slopes of the Black Hills, merely miles away from Mount Rushmore, Rapid City is a draw for many tourist. However, retirees are also drawn to this area due to employment. For those wanting to continue working after retirement, Rapid City provides a variety of opportunities as the employment level is just 0.9%, the fourth lowest of the 494 cities in the study. Additionally, the effective tax rate for a retiree annually earning $42,000 is only 6.7%. There is no state income tax and sales tax of only 6%. Because of this, Rapid City has the fifth lowest effective tax rate of any major US city.
- Tyler, Texas
The Rose Capitol of the World presents appealing statistics for those working after retirement. Not only is Tyler home to the largest rose garden in America but it also has a median annual housing cost of $10,000; $3,500 less than the average home among other cities. Additionally, the unemployment rate among seniors is only 3.5%.
- Johnson City, Tennessee
Because the median annual housing rate in only $8,184, Johnson City is a great place for retirement as housing is often the biggest expense seniors face after retirement. The additional bonus of a low unemployment rate of 3.8% among seniors is another benefit to living in this beautiful city.
- Victoria, Texas
The tropical climate of this city located near the Gulf of Mexico is a wonderful retirement location for those who enjoy the sun and mild weather. However, the weather is not the only perk of Victoria. With an effective tax rate of 7.6% (includes sales and property tax) on a senior earning $42,000 annually, Victoria has the 46th lowest rate in the SmartAsset research.
- Sioux Falls, South Dakota
Returning again to South Dakota, Sioux Falls provides its senior citizens with low income taxes and a low unemployment rate of 2.2%. This ranks the city as having the 20th lowest rate among the cities researched.
- Billings, Montana
Seniors living in this city benefit greatly from one of the strongest regional economics in the country. With a 2.3% unemployment rate among senior citizens, Billings rate is the 22nd lowest in the country. Additionally, the city is known for numerous recreational opportunities. With 1.25 recreational facilities or businesses for every 1,000 residents, the city ranks in the 22nd position for having the most facilities for seniors. It is important to note however, that Montana is among the few states to tax Social Security income. Therefore, the total effective tax rate is slightly high at 12.6%
- Knoxville, Tennessee
Located near the beautiful Smokey Mountains, Knoxville not only provides seniors with a beautiful landscape but also great features for worktirement. Scoring in the top 200 in all the metrics used in this research, this city proves to have positive variables all across the scale.
- Abilene, Texas
Returning once again to Texas, we find another city which is great for those who want to continue to work after retirement. With an unemployment rate of 1.6% among senior citizens, the 7th lowest in the country, it is safe to say that almost every senior who wants to work will be able to find a job in this town.
- Roanoke, Virginia
This city is the only city east of the Appalachian to rank in the top ten. Roanoke not only provides a beautiful place to live with countless attractions all around, but also has an annual housing rate of $9,372. This is very low considering the house rate in other eastern cities (for example Washington D.C at $17,508). The unemployment rate is also below the national average at 3.9%; therefore, it will not be too difficult for senior citizens to find employment.
- Scottsdale, Arizona
Last but certainly not least is the most Western city on the top 10 list. Providing a warm climate, Scottsdale is a wonderful location for senior citizens who enjoy warm weather and a laid back culture. Out of the 5 metrics used to gauge the quality of life in each city, Scottsdale ranked in the top 50 all across the scales and ranked 11th for having a high population of people over 65 (approximately 20%).
No matter where in the country you desire to live, there are many places which are ideal for people desiring to continue to work after retirement. Not only does such a move help to provide additional financial support, but it also helps seniors stay involved with their community.
Even though the year is already in full swing, 2016 may mark the year you begin retirement. No matter when your retirement begins, it is never too early to start preparing yourself for your new lifestyle. In other words, putting your financial elements in order so you can transition effortlessly out of the workforce. However, making such a transition may sound overwhelming; where do you even start? In order to help you make a smoother transition, below is a checklist to make sure you cover all your basis before retiring in 2016.
1. Check Your Post-Retirement Budget
A difficult element many people experience when first beginning retirement is the change in their income. Once the flow of money starts slowing down, it can create gaps in your budget. In order to avoid such a major shock when your finances change, it is important to plan. Have an idea of what expenses you will have and whether you have enough money set aside in order to maintain your intended lifestyle. Additionally, if you are several months away from retirement, it is advisable to take your budget through a test run in order to experience the change and perhaps discover areas which will need readjusting. A trial run will help you to see issues before placing yourself square in the middle of retirement.
2. Run the Numbers on Social Security
The amount of benefits you will receive depends in part on how old you are when you apply for Social Security. If for example you decide to begin taking Social Security at age 62, your payments on a monthly basis will be small. However, if you decide to wait until 70, your benefits will increase. In order to have a better understanding of how much you will receive through Social Security, it is important to calculate the figures and have a clear understanding of how much you will receive before you retire.
3. Plan for Health Insurance
When thinking about health insurance, there are several things to consider. Three-months prior to turning 65, you are eligible to file for Medicare. But if you are planning to retire before this age, you need to make sure you have enough money to cover the gap. There are a couple of outlets which could potentially provide you with a healthcare outlet before 65. First, if you were covered by your employer’s insurance, you have the option of getting COBRA coverage. Second, you could purchase a plan from the federal healthcare marketplace.
Additionally, if you have a health savings account, you need to decide how you are going to handle that money. If you are pleased with the plan you have presently, you can leave it with your employer until the need for that money arises. You could also choose to move that money into another HSA account. Once you turn 65, you can withdraw the money for anything without paying a penalty. It is important to know that you will pay regular income tax on this money if it is not used for medical expenses.
4. Look Ahead to Next Year’s Taxes
While 2016 is not even halfway over and you have already been through the task of paying taxes for 2015, it is never too early to start thinking about how tax time will change once your retirement begins. An important element you need to plan is how you will withdraw from your investment and retirement accounts.
As a rule, it is usually better to begin withdrawing from accounts which are taxable. Money you receive from investments will be subject to taxation at the capital gains rate. Therefore, if you have had your investment for longer than a period of one year, the tax rate will fall within the range of 0-20%. The actual percentage will depend on your annual income.
The next outlet from which to withdraw is your tax-deferred accounts. Examples of such accounts include your 401(k) and your traditional IRA. When you withdraw money from these outlets, the money will be taxed; however, it will be at your regular rate. If you have accounts such as a Roth IRA which is not taxed by the federal government, it is a good idea to pull money from this account last. By withdrawing in this order, you are using your taxable money first then slowly working towards money which is not; therefore, allowing for less taxes to be paid as your retirement proceeds.
5. Don’t Forget About RMDs
One important thing you need to take into consideration concerns your tax-deferred accounts. If you decided to wait a little longer before retiring it is important for you to know that once you turn 70 ½ you must take required minimum distributions from any of your tax-deferred accounts. This includes any employer-sponsored retirement plans, traditional IRAs and SIMPLE IRAs if you are self-employed.
If however, you neglect to take a minimum distribution at the appropriate time, a 50% tax penalty will be applied to you. This is a large sum and could eat into your retirement funds tremendously. Therefore, if you are approaching this age, it is important to handle your money in such accounts as to avoid a large penalty.
Although managing your finances during retirement may seem like a daunting task, taking careful steps such as the ones listed above will help relieve some of the stress and allow you to enjoy your retirement even better.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. Please consult your financial advisor for additional information concerning your specific situation.
As you are reaching the age when retirement is not far away, you may begin to feel a little stressed worrying if you have enough of a nest egg to retire without many issues. If up until now you have been diligent in putting money aside for retirement, you probably feel as if you are in good shape. However, if retirement saving has not been a priority, now that you are in your 50s there is no time to waste. In order to help you become more prepared for your retirement, check out the following steps you should begin taking right now.
1. Play Catch-up
If you are in the age bracket of 50 or older, you actually receive a bonus when it comes to saving for retirement. If you have reached the maximum annual contribution level on your IRA or 401(k), catch-up contributions will assist you in saving even more on an annual basis. Although the rules of catch-up contributions are subject to change, as of 2015, you are allowed to save an additional $6,000 in your employer’s plan and another $1,000 in your IRA. Therefore, taking advantage of catch-up contribution allowances while you are in your 50s, will allow you to save approximately $30,500 towards your future retirement.
This is a hypothetical example and is not representative of any specific situation. Your results will vary.
2. Rethink Your Portfolio
Although it is often advisable to invest some of your money in riskier investments, once you near retirement age, it might be a good idea to rethink your portfolio and also rebalance your investments. This is especially true if you have not saved much for retirement thus far. In order to begin expanding your retirement funds, it is advisable to shuffle your investments around and consider assets (such as bonds) which provide a little more security for your money.
3. Crunch the Numbers on Social Security
Social Security is often used as a supplement to a person’s savings. However, in order to have an idea of how Social Security will play into your financial wellbeing, it is important to calculate numbers in order to fully know how much you will actually receive. For example, if it is part of your plan to start drawing on Social Security at the age 62, the youngest age at which you can draw, it is important to know that the benefits you receive will be comparatively smaller. However, if you decide to wait until full retirement age before you begin withdrawing, you will receive 100% of your benefits. Additionally, if you are able to wait until sometime between the full retirement age and 70, you will also receive a bonus. Due to the differences in payouts depending on your age, it is important to carefully check the numbers before deciding a time at which to starting drawing Social Security.
4. Knock Out the Rest of Your Debt:
If you are still carrying around debts such as student loans or credit card debt, it might be a good idea to go ahead and eliminate those before you begin retirement. Getting rid of your debt will help you save additional money when you retire and eliminate many of the expenses you have been working into your budget for so many years. However, it is important to note that although getting rid of such debt is important, it should never hinder you from putting money aside for your retirement. While paying your debt off is good, your retirement fund is just as equally important.
5. Consider Long-Term Care Insurance
Long-term care is specifically designed to pay for some or all of your medical expenses should you need care such as nursing home care or home health aid. Medicaid can also help to pay for these expenses should they arise; however, you may end up spending most of your assets in order to qualify. If you have built up a solid retirement fund, then a long-term care policy will help you to get the most out of your money and ensure all the hard work you put into building a nest egg doesn’t go to waste. A good thing to keep in mind when considering long-term care is that the younger you are when you apply, the lower your payments will be.
6. Practice Living on a Post-Retirement Budget
A huge mistake people in their 50s often make concerning their retirement is not setting realistic goals for what they will need. After all, it can be quite a shock once you move away from a steady salary and start relying fully on your savings and Social Security benefits.
In order to assure this difference in income does not cause great difficulty, it is advisable to take specific steps before entering retirement. First, it is important to calculate your intended retirement expenses then plan a budget which helps you to pay your monthly expenses. Second, it is a good idea to take your budget through a trial run. Getting an idea of how your budget will actually work when you retire is a good way to catch issues before it is too late. If you see the monthly budget you have allotted will not be sufficient, you may need to look at places where expenses can be cut down or even consider ways to expand your income-earning years such as through worktirement.
Although you may be several years away from retiring, it is never too early to begin making preparations. Early planning and research will help to make the transition into retirement a little smoother. Additionally, in the realm of finances, having a specific plan for your money will help you to avoid many of the pitfalls which occur with who neglect to take the necessary precautions to assure their retirement goes as smoothly as possible.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. You should discuss your specific situation with the appropriate professional.