Pat Sterner, who runs her own business consulting for nonprofits in Duluth, Minnesota, would like to retire and spend more time kayaking on Lake Superior. In the summer, she says, neighbors “always knock” on her door to take her out.
But even though she would like to take fewer customers, she is not quite ready to close the store.
“My kids laugh and say, ‘Are you really retiring?'” Sterner, 66, said. “It’s a little nervous. I would like to leave the door open. “
Sterner’s concern – to have enough money, to leave the business she built – reflects the concern of millions of people who are close, but not quite ready, to retire.
For many reaching retirement age is not just a two-week warning. You may want to extend your career or end your working life or business. If you have the opportunity, you can continue to work for up to 70 years (or more) if you get the maximum possible social security payment.
These intermediate people are slowly planning to arrive at a time when they are no longer working. What’s included is a subtle puzzle with solutions, egg support and financial calculations. This transition also provides an opportunity for reflection and short-term planning.
Approximately 55 million Americans are 65 years of age and older, and those born at the peak of the baby boom have reached an important age this year. As the combination of a pandemic, job changes, inflation and higher health care costs continues to sting retirees, millions of people remain in the workforce until they retire fully. Whether you’ve already chosen an expiration date or are considering options, there are a few issues to consider.
Social security benefits
The age at which you receive Social Security is crucial to planning your tax and investment portfolio, so get some figures on benefits for different ages. The good news is that you will not be taxed on the “income penalty” of social insurance if you work and receive benefits at the age of 66 1/2 or later, which for most people is what the Social Security Administration calls full retirement age. Sure, you can start receiving benefits at any time after age 62, but the sooner you retire, the lower the monthly payment.
The administration looks back on your best salary years and forward to the age when you start receiving payments to calculate your monthly check. While many financial advisors advise their clients to wait as long as possible to pull the social security trigger, only a few do. About 5% of people surveyed last year by asset manager Schroeders said they have been taking out social insurance for 70 years when the maximum possible benefits are paid. This often leaves a gap that needs to be filled.
Keep in mind that Social Security is complicated when you consider family benefits, which are usually half of the basic insurance amount of another beneficiary or the amount you will receive at full retirement age. You can apply for family assistance starting at 62, or you can wait to apply later to get higher assistance. You can also get a bigger payment based on your own lifetime income record. You will need to run a few numbers to see how to maximize payouts. Divorced people in certain circumstances may also be eligible for family benefits.
You also need to schedule Medicare before you turn 65. There are a number of programs you need to know about, so spend some time on medicare.gov. Also note that Medicare premiums are tiered – there are six levels – and are revenue-based: the more you earn, the higher the premium. Your tax filing status also matters in pricing.
Of course, none of the Medicare parts provide 100% coverage, but you can buy additional Medicare insurance, known as Medigap, through private insurers. Premiums vary greatly depending on how much of your out-of-pocket expenses you want to cover, your age and whether you smoke. Medicare Advantage plans may also cover some out-of-pocket expenses.
At the very least, evaluate your benefits and limit insurance costs at different ages.
You need to balance maximum social security and the use of other savings to achieve the desired retirement date. Another key factor when planning social security is your health and longevity. Those who can expect to collect up to 70 years are usually in relatively good health and do not face serious chronic diseases.
“Your family history and longevity are very important,” said Nicole Strbich, a certified financial planner at Buckingham Advisors in Dayton, Ohio. “We include Medicare planning with clients as part of their retirement talks. Understanding the time it takes to apply for benefits and the expected costs – the estimated level of inflation for those costs – and the increase in costs for higher-income earners are important components of a retirement plan. ”
Once you run some numbers on social media and Medicare, you can create a chart. Your employer can even help you with “phased” retirement programs in which you gradually reduce your hours to a specific year.
In response to the long-standing trend of employees over the age of 65, these programs cover those who are not ready to fully retire. Although the level of the labor force over the age of 65 varies from year to year, it is about 19% compared to the historical average of almost 17%, according to the Bureau of Labor Statistics.
The reasons for postponing retirement are many. In many professions, improving longevity means being able to work longer. Many find meaning in work, so want to continue. Others may need to save more, as guaranteed pensions with fixed benefits have become the exception rather than the rule. Many workers just want to take advantage of the extra amount of annual money they can save in 401 (k) style plans.
While phased retirement programs are becoming increasingly desirable in the workplace, they are also rare. According to the Society for Human Resource Management, only about 15% of employers offer some kind of phased retirement, and about 6% offer a formal program, although you can agree on a phased plan yourself.
Funding your exit
Planning is necessary. One of the first points Sterner in Minnesota discussed with Sam Brownell, a certified financial analyst at Stratus Wealth Advisors in Kensington, Maryland, was her income and expenses.
“What are my costs and how can they change?” was one of the first questions they had to answer and she is still trying to answer.
As for income, she also needed to know, based on her annual expenses, how her reduced income could require withdrawal from her SEP-IRA, a self-employed retirement plan.
Brownell (who is also her nephew) said the decision to wait until age 70 was important because you’ll need to “look at your cash flow during that time.
“Increasing social security benefits depend on a person’s year of birth,” he said. “For example, if you were born after 1943 and defer payment until age 70, your annual increase is 8% per year.”
Another part of the transition is tax planning. Withdrawals from defined contribution plans, such as SEP-IRAs and 401 (k) s, are taxed at the federal level, while withdrawing money from a Roth IRA is not – unless you are at least 59 1/2 and keep the money in on account for at least five years.
There are also tax wrinkles in the future with defined contribution plans: The Internal Revenue Service requires that most people start choosing money at age 72 in the required minimum distributions. However, this rule does not apply to qualified Roth withdrawals.
Turning a regular IRA into a Roth, which will generate a one-time tax bill from the IRS, may be fine, depending on your income. Brownell advised workers to consider the move long before retirement to save taxes in the future.
“Turned to Roth may be paying a lower federal income tax in the years of‘ cuts ’,” he added.
Because of the tax hit when converting Roth, you’ll need to talk to your tax or financial planner or hold the numbers on an online calculator to see if it makes sense to you.
Do it yourself or get help?
You can of course manage the transition yourself or get professional help. Finding only a paid certified financial planner is a good start. You can find a planner who will work for a fixed fee or an hourly rate. Don’t hire anyone who wants to sell you investment products.
It is always a good idea to increase the ovum over time. For 2022, you can contribute $ 20,500 to your 401 (k) plans or other defined contribution plans. That’s $ 1,000 more than last year. People over the age of 50 can add $ 6,500 as catch-up contributions.
After all, the quality of your life is the biggest factor. In Sterner’s case, this involves “managing my finances, so instead of arguing with customers, I can fight lake trout with my kayak”.