Even if you plan to postpone retirement until well past 65, there are things to do in advance to assure a smooth transition when the time comes.
Make sure you understand the rules and timing for both Social Security and Medicare to maximize benefits and avoid penalties.
Build a financial safety net before you stop working to help ease your way from saving to creating your own paycheck.
Please note: This article may contain outdated information about RMDs and retirement accounts due to the SECURE Act, a new law governing retirement savings.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 in a few months, and still working. I have no immediate plans to retire, but I’m wondering what I should be thinking about as I navigate through this transitional time over the next few years.
Your question is right on target with today's retirement reality as people are living—and working—longer. According to the Employee Retirement Benefit Institute's 2016 Retirement Confidence Survey, 37 percent of workers expect to retire after age 65; six percent don't expect to retire at all.
There are varying reasons for postponing retirement, from economic stability to personal fulfillment. But whatever the reason, and however long we plan to remain working, there are retirement-related financial concerns we still need to deal with in our sixties. So you're smart to be planning for this eventual transition now to avoid potential snags down the road. Here's what I suggest.
Wait to file for Social Security
Just because you reach "full retirement age” doesn't mean you have to collect Social Security benefits, especially if you're still working. The longer you wait, the more your benefits will increase—up to age 70. Monthly benefits increase between six and seven percent for every year you delay from age 62 to your FRA, and then grow eight percent a year between your FRA and age 70. 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'll be automatically enrolled in Medicare Parts A and B at age 65. (Note: not that this is different from your FRA for Social Security.) But if you haven't, you have a choice to make.
Most people will 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.
Another caveat: Once you enroll in any portion of Medicare, you can no longer contribute to a Health Savings Account. So if you’re relying on your HSA to boost your savings, you’ll need to postpone Medicare.
Consider postponing Medicare Parts B and D
Both Medicare Parts B and D have high-income premium surcharges, so you may be better off sticking with your employer plan. However, once you leave your job, you have eight months to enroll in Part B or face a penalty. Part D also has a late enrollment penalty if you go more than 63 days without prescription drug coverage.
Continue to sock away for retirement
No one should ever walk away from an employer’s 401(k) match. But beyond that, you may be wondering how much to continue to funnel to your retirement accounts—and for how long. The good news is that as long as you’re working, you can continue to contribute the legal maximum ($24,000 in 2016) to your 401(k) regardless of age. If you anticipate being in a high tax bracket come retirement, you might want to consider a Roth 401(k), if available.
Once you reach 70 ½, you can't contribute to a traditional IRA. Roth IRAs don’t have an age limit, but they're restricted to those who earn less than $194,000 (combined income for a married couple filing a joint return) or $132,000 (single).
On the other side of the equation, earning a paycheck means you can delay taking a required minimum distribution (RMD) 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 of the year you retire. You will, however, have to take an RMD from your traditional IRAs once you hit 70½. There's no RMD for a Roth IRA.
Think about your mortgage
Conventional wisdom says we should pay off our mortgages before we retire. To me, 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 if you can count on a reliable pension or other income. Before you rush to pay off your mortgage, especially if that involves selling securities or will reduce your liquidity, I'd consult with your financial advisor and think through your options.
Plan how to turn your portfolio into your paycheck
Switching from saving to spending and depleting what you've worked so hard to build can be a difficult transition. My advice is to take it slowly and create a safety net. So before you stop working:
- Review your net worth statement to 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.
- Consult with your financial advisor to create a tax-efficient drawdown strategy.
As we're healthier and living longer, it's great we can choose to work for as long as it's financially and personally rewarding. But planning carefully for the eventual transition to retirement has its own rewards, and can make the next phase of life even more fulfilling.