Planning to Work Forever?

No one on their deathbed says, “I wish I had worked more”…right? That may have been true in the past, but these days one in three workers expects to “retire at 70 or beyond or not at all,” according to the Employee Benefits Research Institute.

Some workers just haven’t saved enough to retire. Others have returned to the workforce after decades of child-rearing and don’t want to cut short their second careers. And others simply love what they do—they’re not dreaming of babysitting the grandkids, moving to a warmer climate or pursuing a hobby. Their jobs give them a sense of purpose, connections with colleagues and a way to stay busy, engaged and mentally sharp.

Whatever your reason for not wanting to retire, Keven DuComb, JD, a senior planning and estate strategist at the financial advisory firm Altfest Personal Wealth has some good news for you. From a personal-finance perspective, postponing retirement beyond normal retirement age is a great idea. The advantages…

You can continue building your nest egg by adding to tax-deferred accounts such as 401(k)s and IRAs.

Your salary allows you to leave those investments untouched so they can potentially appreciate and generate higher compounded returns.

You will have to live off your savings for fewer years, as well as enjoy greater security, a potentially higher standard of living and the ability to leave inheritances for your family and friends.

But, warns DuComb, never-­retirees still face a number of financial minefields involving Social Security, Medicare and the IRS. Here are four critical mistakes to avoid…

Mistake: Taking Social Security benefits early when you don’t need the money. If you elect to begin Social Security before you reach full retirement age (FRA)—between ages 66 and 67 depending on the year you were born—you face two consequences…

A reduced annual benefit based on how many months you are from FRA, and that reduced amount remains for the rest of your life.

A penalty for earning wages or for self-employment income while receiving Social Security checks. For 2023, if you haven’t reached FRA and earn more than $21,240 annually from a job, you lose $1 of your benefits for every $2 that you earn above $21,240. If you reach FRA in 2023, your monthly benefits will be reduced by $1 for every $3 earned over $56,520 up to the month before FRA.

Caveats: Once you do reach FRA, the benefit reductions due to earned income stop, no matter how much you earn. Also: The benefits you lost due to excess job income aren’t gone forever—at FRA, the Social Security Administration adjusts your future benefits so that you recoup the amount that was withheld over time.

Another reason to delay Social Security benefits while you are working: If you and your spouse have a combined taxable income greater than $32,000, the payouts from Social Security are taxable. Taxpayers filing jointly who are collecting Social Security will have to pay taxes on 50% of their benefits if they earn between $32,000 and $44,000 per year…and up to 85% if they earn more than $44,000 per year. In addition to federal income taxes, Social Security benefits are taxable in the following 11 states—Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah and Vermont.

Good news: If you can live off of your job income in your 60s and delay Social Security benefits until the maximum age of 70, your permanent monthly benefit will grow 8% annually between your FRA and age 70. And since your benefit is based on your 35 highest-earning years, working past FRA also may increase your base monthly payments.

Mistake: Not signing up for Medicare because you have employer health insurance. Most people are required to sign up for Medicare at age 65. If you don’t, you pay a 10% surcharge on your Medicare Part B (medical services) premiums for each year you go without coverage starting the month you’re eligible for coverage. You also pay a penalty of an extra 1% of Part D (prescription drugs) ­premium costs a month.

But you often can delay enrolling in Medicare and not be penalized if you are still working—but that depends on the size of your employer.

If your employer has fewer than 20 employees: Small companies may provide bare-bones coverage or none at all for over-65 workers. Ask your employer if you are required to sign up for Medicare. If you don’t sign up, any job-based health insurance may leave you with large coverage gaps in the event of illness.

If your employer has more than 20 employees: The company is required to provide health insurance to all employees, regardless of their age. Employer plans tend to be more comprehensive, so you won’t need Medicare. What to do: Compare what you would pay for your group health benefits with what you would pay for the cost of Original Medicare, a Medicare Supplement (Medigap) plan and a Medicare Part D plan. Example: If your workplace plan premiums are supplemented by your employer and include dental and vision coverage, it might make sense to stick with it. Also, employer coverage can be especially valuable if your spouse is younger than 65 and covered by your plan. Even if you decide to go with your employer’s plan, consider signing up for Medicare Part A (hospital coverage) anyway because it typically is premium-free and covers hospital costs that your employer plan does not.

Caveats…

Before you go on Medicare and decline employer-based health insurance, ask your employer whether you can resume your employer coverage if you change your mind.

If you have a high-deductible health plan along with a health savings account (HSA), you can no longer contribute to an HSA once you’ve enrolled in either Medicare Parts A or B.

If you turn 65 and are collecting Social Security, you will be automatically enrolled in both Part A and Part B unless you specifically request otherwise.

Important: If you are older than 65 and lose your employer health insurance coverage or leave your job, you have up to eight months after the month your coverage ends to sign up for Medicare. After that, you’re subject to late-enrollment penalties.

Mistake: Not having a backup plan. Just because you want to work forever doesn’t mean that you’ll be able to. About 40% of workers leave the workforce earlier than planned, typically due to personal or family health problems or because they are laid off. Take the following steps to make sure you are prepared for unexpected retirement…

Stress test your current finances and potential retirement income annually for a worst-case scenario, meaning that you have to stop work abruptly and lose your regular paycheck. We work with our clients to develop some assumptions as to the “worst case” and then use planning software to run alternate scenarios showing the impact of these worst-case assumptions. This can lead to potential solutions, which would become the action item—it might mean different savings and investment patterns, or it might mean curbing expenses in certain areas to allot for “what ifs.”

Bump your emergency fund up to one year’s worth of expenses in cash. If you have to stop working, it’s likely to be for health reasons, meaning that you could face unexpected out-of-pocket costs.

Reconsider your investment ­portfolio allocation. Many over-65 workers maintain a more aggressive allocation to stocks in their portfolios because they don’t need the stability or income-generating investments that retirees typically do. But you don’t want to be forced to tap your investments in a bear market. What to do: Maintain the long-term investment allocations that you are comfortable with, even if they are aggressive. But carve out a portion of your savings—perhaps a few years’ worth of expenses—to invest more conservatively so that the rest of your portfolio has time to recover in the event of volatility.

Mistake: Not preparing for an IRS tax bomb when you hit age 73 (or 75). That’s when you begin taking annual required minimum distributions (RMDs) from your traditional
401(k)s and IRAs if you were born after 1950 and before 1960…age 75 if you were born later. The ­withdrawals are taxed at your ordinary income tax rates. If you are still employed, the combined income from your RMD and your paycheck could push you into a higher income tax bracket…and that also can trigger higher Medicare premiums. Strategies to counter a tax bomb…

Use the special 401(k) tax exemption from the IRS. As long as you are working, you are not required to take RMDs from your current employer’s 401(k) plan unless you own 5% or more of the company. In addition, your employer may allow you to roll over your old 401(k) plans from other jobs into your current plan, so you can delay taking RMDs from those accounts as well.

Invest in a Qualified Longevity Annuity Contract (QLAC). In 2023, you are allowed to spend up to $200,000 from tax-deferred accounts to purchase a deferred income annuity that begins payouts in advanced old age. The amount you invest in a QLAC isn’t counted when calculating your RMD. Example: If you have $500,000 in an IRA at age 70 and invest $150,000 in a QLAC, your RMDs would be based on $350,000 in assets. You can delay taking payouts from a QLAC until you turn 85. Once you do start taking income from the QLAC, it will be taxed, along with your other RMDs, but by that time, your tax rate is likely to be lower because of lower income and increased deductions.

Steer your retirement contributions in your 60s to Roth 401(k)s and Roth IRAs. You won’t be able to take a tax deduction for these contributions…but after five years, any earnings you withdraw are tax-free. Also: Roth account owners are never subject to RMDs. Nearly 90% of employers now offer a Roth 401(k) option.