There used to be an assumption that at age 65 without question you would be hanging up your employee hat. You know what they say about assuming. The notion of retiring at 65 remains ideal, but increasingly unrealistic.
Numerous surveys show that people are deciding to delay retirement. One of the latest from Intuit showed that 52 percent of those polled fear being unable to retire by age 65, because of a lack of funds and an inability to save Thus, the graying workforce gets grayer.
Working past 65 is becoming the norm. Some continue working because they want to, but more likely, many more work because they must. The question though, is continuing to work beyond 65 a smart financial strategy?
The benefits of working past 65 are obvious and plentiful. For one thing, you have more time to continue saving for eventual retirement. You can take advantage of employee benefits, particularly those that might be superior to what you get through Medicare.
“You continue to add to the economy and don't drain it by using entitlement programs. Working keeps you healthy, staves off mental illnesses and you develop new relationships,” says financial planner Jeanne Brutman.
Understand the potential pitfalls
While extending your retirement date is an option, it is not without caveats. “The decision to work – what type of work and how many hours – will be based on how individuals value the quality of life the income provides by increasing spending ability and financial security versus how they most enjoy spending their time,” says Len Hayduchok, and certified financial planner and founder of Senior Momentum, a non-profit.
There are key considerations. Realize that you can't bank on being able to physically handle working. What if you get sick and can't work, then what? What's the backup plan? Even if you're healthy at say 68, will working add stress that creates illness? The bottom line: it's a bit risky to assume that you will be able to keep working, “As we get older we are more likely to have a disability, accident or sickness that could make your plan to work to 70 to 75 impossible,” explains Michael Fliegelman, a financial advisor with Strategic Wealth Advisors Network. Another drawback, he says, is that if you work to say 75, and then retire, your ability to enjoy your retirement savings, by being active and pursuing your hobbies, such as traveling and golf, may be restricted once again by your health. As they say, your health is your wealth. “More time to save equates in some way to less time to enjoy,” he says.
Know too, that while if you are self-employed then you may have the control to work past 65, but if you work for a large corporation, there may be rules, plans, procedures or even incentives that cause you to retire at a certain age, possibly 65 or there about, says Fliegelman.
Then there are the financial pitfalls of working past 65. A recent Morningstar article lays out in details some of the issues. According to the article, if you wait until your full retirement age or later to file for Social Security benefits, you can earn as much income as you like and not see your Social Security benefit reduced at all. “However, if you've claimed benefits prior to your full retirement age (currently 66, rising to 67 for younger baby boomers), you'll be hit with a penalty of earnings that exceed $14,640 (in 2012) until you hit your full retirement age. For every $2 that your wages are over that limit, your Social Security benefit will be reduced by $1. In the year you reach your full retirement age, you can earn up to $38,880 without a benefit reduction; once your earnings exceed that threshold, your benefits will be reduced by $1 for every $3 over that amount until the month you hit your full retirement age.”
If that's not sobering enough, the article goes on point out, that even if you're past full retirement age, Social Security benefits become taxable once your income exceeds a certain threshold. Simply put, continuing to work will likely increase the taxes you owe on your benefits. According to Morningstar, for the highest-income people, Social Security benefits can be up to 85% taxable.
Figuring out the financial implications is complicated. Talk to your financial advisor about the pros and cons of working past 65 to determine what's best for you.
While many are gambling that they will be able to work past 65, how big an appetite do you have for risk? Is it time for Plan B?