Feathering the nest
To boost benefits, work until full retirement age — if you can
Men and women have a longer life expectancy than in previous generations, and many readers worry that their nest egg will not be sufficient to last the rest of their lives.
It is not unusual to see people facing 25 or more years in retirement. That's a long time to be without steady income from a job and to rely on savings and investments.
Interest rates on traditional savings vehicles are likely to remain low, and experts predict that returns on stocks and bonds in the foreseeable future will likely return 2 percent or less than in prior generations.
Many retirees who use the traditional rule of withdrawing 4 percent each year at the start of retirement and increasing withdrawals to keep up with inflation will run out of money. Naturally, retirees who do go back to work, even part-time, will be able to withdraw less from their investments and be able to make their nest egg last longer.
Most retirees do not wait until their full retirement age to initiate Social Security payments. To the extent that retirees can postpone filing, income from Social Security will increase.
An individual whose full retirement age is 66 who files for Social Security benefits at age 62 faces a 25 percent permanent reduction in his or her benefit. If a retiree files after his or her full retirement ago, the benefit will increase by 8 percent per year up to age 70.
Another advantage of postponing is the impact on spousal benefits. A person is entitled to up to 50 percent of their spouse's Social Security benefit if he or she waits until full retirement age to file for spousal benefits. If the spouse applies for benefits at 62, the benefit will be less.
Postponing filing for Social Security until after full retirement age also raises the widow(er) benefit. A surviving spouse is entitled to the greater of 100 percent of the deceased spouse's Social Security benefit or the benefit earned based on the work record.
Many retirees don't believe they can wait until their full retirement age to file. Obviously, it's easier to wait until full retirement age if they can work even part-time.
Working retirees under 701/2can contribute to an IRA and obtain the tax advantage of tax deduction and tax-deferral. Retirees older than 701/2can contribute to Roth IRAs and obtain tax-free income.
There are some potential disadvantages of working during retirement. Once retirees reach 701/2, they are faced with mandatory withdrawals based on the size of their retirement account and their age. To the extent that the retirement account is larger, the income tax will be higher, and they may be in a higher tax bracket.
Another possible disadvantage is for people who applied for Social Security benefits before their full retirement age and continue to work. Until full retirement age, there is a $1 reduction in the benefit for every $2 earned above the current annual limit of $15,720.
The year workers reach their full retirement age, Social Security will deduct $1 in benefits for every $3 they earn above the current limit of $41,880. However, after they reach their retirement age, they will earn back these penalties.
Another potential disadvantage is the possibility of higher Medicare premiums. If your modified gross income from two years ago is above $170,000 if you file jointly ($85,000 if you file individually), your part B premium will be higher.
Statistics show that many retirees have not saved enough prior to retirement to ensure that they will not run out of money. Hopefully, if you are still working, you can increase your savings rate. For those retirees whose nest egg is insufficient, working part-time is an option.
Avoid filing prior to your full retirement age, if you can, to prevent a permanent reduction in your benefits.
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