How Working Longer Changes Retirement Strategies

Those who keep working past age 65 need to consider actions that might optimize their Retirement plans.

There are a lot of reasons to work past typical retirement age, and the reasons for staying in the labor force often indicate how the retirement plan should change during the additional working years. Consider these actions.

Establish a plan for eventual retirement. Set a target date for retirement. Decide whether it is a hard date, meaning you’ll stop working altogether, or a soft date after which you’ll work less than a
full schedule.

Some people don’t retire because they don’t know what they’ll do in retirement. Working is a form of procrastination. For people in that situation, it’s important to set a target date and use the additional working years to consider how you’ll spend time after that.

Review retirement fund spending. What you do with your retirement nest egg during the additional working years depends on why you’re deferring retirement.

If you’re working because of concerns about retirement financial security, be sure to defer drawing down the nest egg. Don’t use retirement fund distributions to supplement your income during these
additional working years. Deferring retirement fund spending for even a few years can substantially enhance retirement security.

On the other hand, if you’re deferring retirement for non-financial reasons, consider spending some of the nest egg as kind of a trial retirement. For example, take more expensive and longer vacations. Or splurge on an item or experience you’d like and can afford. This can make you look forward to retiring.

Continue saving. A few more years of contributions to a 401(k) or IRA can enhance retirement financial security significantly. That’s especially true if an employer matches 401(k) contributions.
If you have a lot of money in 401(k)s and traditional IRAs, you might want to forego the current tax breaks and make contributions to Roth accounts or taxable accounts to establish tax diversification.

Consider deferring IRA conversions and 401(k) rollovers. Your tax bracket might drop after you stop working. Also, including the converted amount in gross income during your working years might push you into a higher tax bracket. So, you might not want to convert a traditional IRA to a Roth IRA until retirement when the conversion might be less expensive.

While you’re working, carefully review your rollover and conversion options. You probably can roll over your 401(k) to an IRA anytime after age 59½, even if you continue working.

But required minimum distributions (RMDs) have to be taken after age 70½ from a traditional IRA, even if you still are working. On the other hand, RMDs don’t have to be taken from a 401(k) when you’re still working for that employer, unless you’re a 5% or greater owner. Keeping the money in a 401(k) allows you to continue the deferral.

In fact, you might consider rolling a traditional IRA into your 401(k) plan if your employer allows such rollovers. That allows you to defer the RMDs if you’re still working.

Review Social Security and Medicare decisions. You probably want to delay Social Security retirement benefits until at least full retirement age. If you begin benefits before then, some or all of the
benefits will be recaptured when your earned income is too high ($17,040 in 2018 when you’re under full retirement age for the entire year).

Social Security benefits aren’t reduced because of earned income once you reach full retirement age. Also, since you’re working and probably don’t need the additional income today, it might make sense to delay Social Security benefits so the benefit amount can increase. If you started receiving benefits,
consider suspending them until age 70 or until you stop working, whichever occurs first.

You might need to enroll in Medicare at age 65 to avoid a lifetime penalty for late enrollment. Some employer medical plans qualify you to delay Medicare enrollment without penalty.

But if your employer has 20 or fewer employers or you’re self-employed, you probably don’t qualify to delay Medicare. Check with your health insurer or human resources department to determine if you
should enroll in Medicare at 65, even if you’re working.

Pay down debt. Those additional working years probably should be used to reduce or eliminate any debts you have. Being debt-free in retirement gives you much more flexibility in your spending
plan and reduces stress.

Practice retirement. Working past traditional retirement age gives you an opportunity mentally and emotionally to adjust to the next stage of life.

There are several ways to practice retirement. You can live on your estimated retirement income level for a while to see if it is reasonable.

You also can spend more time in the activities you expect to take up in retirement or try new activities to see if that’s how you want to spend time in retirement.

By the way, you might use this period to decide you really don’t want to retire. Unless an employer has a mandatory retirement age, you might decide to “die with your boots on.”

Self-employed individuals and professionals are those most likely to never fully retire, at least as long as they’re physically and mentally able to work, but others also continue working.