A pretty common stereotype when it comes to retirement is the overworked, underpaid worker who would retire immediately and pursue the Island Life if they only could. And while I have worked with some clients whose immediate answer was “tomorrow” when I asked when they wanted to retire, a sizable percentage of clients are working past retirement age because they enjoy what they do. While that is a great position to be in, it does bring with it some financial issues that you should understand if you find yourself in that position.
The first issue is healthcare, and more specifically what to do about Medicare. As with any other insurer, Medicare wants to discourage participants from waiting to sign up until some medical condition leads them to need insurance. To accomplish this, Medicare levies a late enrollment penalty on Part B and Part D if you don’t sign up when you are initially eligible to do so. Premiums for Medigap can also increase in this instance or you may find yourself unable to get Medigap insurance at all.
Fortunately, in many circumstances, if you are still employed at age 65 and covered by your employer’s healthcare insurance, you can forego Medicare and stick with your employer’s insurance. Your spouse can do the same if he or she is covered by your insurance as well. This Kiplinger article provides more information on the ins and outs of employer coverage, Medicare and when you should sign up for Medicare to avoid a penalty and potential coverage issues.
Another consideration is Social Security, and more specifically how what you earn from Social Security will be impacted by working past retirement age. Your Social Security payment is based on your income over your highest 35 earning years. Given that wide calculation base (which you’ll find here), if your career has involved working consistently with a fairly steady salary, tacking on an additional year or two’s worth of earnings after age 65 won’t have much impact on what you draw.
However, a delay in beginning to draw Social Security past full retirement age does have a bit impact. For every year you delay taking Social Security past full retirement age your Social Security payment will increase by roughly 8%. Once you reach age 70, you get no further increases for delaying, but if your full retirement age is 67 and you delay drawing until age 70, your Social Security payment will increase by roughly 25%. The upshot of this is that if you live into your 80s or beyond, your total earnings from Social Security will be greater than they would have been had you begun drawing at age 67.
One last issue to consider in working past retirement age is your retirement accounts and more specifically, whether you can continue to contribute to them and when required minimum distribution (RMD) rules make withdrawals mandatory. Making a contribution to a retirement account requires that you have earned income, but the good news is if you continue to work for pay, you will have earned income. Age also comes into play with retirement accounts, and rules differ by type of accounts.
For the most common types of accounts – traditional IRAs, Roth IRAs and 401k plans – only the traditional IRA disallows contributions once you reach age 70 1/2. Roth IRA contributions are still permissible as are 401k contributions as long as you have earned income. As for required minimum distributions, the IRS requires you to begin taking distributions from 401ks in the latter of the year you reach 70 1/2 or the year you retire, although plan specific rules may require you to take distributions at 70 1/2. Additionally, if you own 5% or more of the company, IRS rules require you must begin taking RMDs at 70 1/2 regardless of whether or not you continue to work.
Few things are as beneficial to a retirement plan as retiring a bit later. Thinking through the issues of working past retirement age can compound that benefit and put you on even more solid financial footing.