Two Tips That Lead to a Better Retirement
Tuesday, June 27, 2017
For many Americans, a broad gap exists between their expectations of how much money they will need in retirement and the reality.
Merrill Lynch's March 2017 Finances in Retirement Survey pegged the average cost of retirement at $738,400. According to a PwC survey, about half of baby boomers have less than $100,000 saved for retirement. Nearly a third have saved less than $50,000.
Despite those discouraging numbers, a comfortable retirement isn't out of reach. In fact, making two simple changes to your retirement plans can brighten your long-term financial outlook.
Tip No. 1: work longer. Retiring after age 65 is becoming the new normal for a growing number of Americans. A Gallup poll conducted in May found that 39 percent of Americans plan to retire after age 65, up from 14 percent a decade ago. Nearly 63 percent said they planned to continue working part time.
Staying in the workforce longer yields multiple benefits for your retirement savings portfolio, including more opportunities to capitalize on positive market swings. "If you keep working past age 65, you can keep your portfolio in growth mode," says Nina O'Neal, a partner at Archer Investment Management in Raleigh, North Carolina.
As you get closer to your target retirement age, O'Neal says, you can begin transitioning your portfolio to include more stable income investments.
Joseph Roseman, managing partner at O'Dell, Winkfield, Roseman and Shipp in Charlotte, North Carolina, says older workers can also beef up retirement savings by making catch-up contributions.
For 2017, workers age 50 and older can sock away an extra $6,000, pushing the total annual contribution limit for a 401(k) to $24,000. Hopefully, Roseman says, by the time you reach your 60s, "you're at your highest income levels and can save the maximum in your employer's plan."
If you're working longer, you should also consider contributing to a Roth 401(k) or a Roth individual retirement account if possible. "Roth contributions don't garner a current tax deduction, but you can access these funds income-tax-free in the future," Roseman says, which is helpful if you're concerned about your tax liability in retirement.
Staying on your employer's health plan is another valuable perk of working longer. "With the rising cost of health care and health insurance and the uncertainty surrounding the Affordable Care Act, it's a scary time to be on your own when it comes to health insurance," Roseman says.
The average 65-year-old couple can expect to spend $260,000 on health care in retirement, according to research from Fidelity Investments. Staying on the job longer can keep those costs from making a sizable dent in your retirement savings.
Tip No. 2: delay Social Security. Working longer is one piece of the secure retirement puzzle. The other is postponing your Social Security benefits.
An April 2017 Fidelity survey found that the number of Americans who plan to claim Social Security early has dropped dramatically since 2008. Just 28 percent of seniors say they'll collect benefits beginning at age 62, compared to 45 percent nearly a decade ago.
Delaying Social Security can give you more income to work with later on. "Social Security, in most cases, should not be taken until one needs it," says Annalee Leonard, owner of Mainstay Financial Group in Pensacola, Florida. "Every year you put off taking Social Security beyond full retirement age, your benefit increases by 8 percent."
Waiting until age 70 would boost your Social Security benefit by 32 percent, or an additional $435.20 per month based on the average monthly benefit of $1,360 in the first quarter of 2017.
Postponing Social Security could also increase your benefits if you're earning more than you were at the beginning of your career.
"Social Security calculates the benefit based on the top 35 years of earnings," Roseman says. "Working longer allows you to replace some of those lower-income early years."
Ken Moraif, a certified financial planner and senior advisor at Dallas-based Money Matters, says seniors must consider how delaying benefits affects their investment strategy. That's particularly important if you're planning to downshift from full-time to part-time work, reducing your income.
"If you delay Social Security benefits, your investments will have to make up for expenses that your wages don't cover," Moraif says. If you foresee a shortfall, you may have to rethink your time frame for shifting investments from growth to income.
Be mindful of taxes. Working longer and delaying Social Security can have tax implications that could affect your retirement strategy.
"The years before you retire are typically your highest earning years," says Michelle Young, a financial advisor with Ameriprise Financial Services in Edina, Minnesota. "Depending on the tax environment, you may be paying a larger portion of your income to taxes while you're still working than you would if you were retired."
Fully funding tax-advantaged accounts in the years leading up to retirement can minimize the tax burden. Young reminds savers to look outside of their employer's plan and supplement their retirement with a health savings account or other tax-advantaged plans.
Taxes are also a consideration if you're converting a traditional IRA to a Roth to avoid required minimum distributions beginning at age 70.5. "When you convert a traditional IRA to a Roth, the amount of the conversion will count as taxable income," Moraif says.
That could temporarily push you into a higher income tax bracket the year you take the conversion. You'll need to weigh the benefit of making tax-free withdrawals from a Roth account in retirement with the tax liability for the conversion amount.
Working longer may also increase your taxes. "More compensation in any year can push a taxpayer into a higher income tax bracket," says Barry Kozak, a consultant with October Three Consulting in Chicago.
While that may mean paying more in taxes in your pre-retirement years, there's a silver lining, he says. Savers can put that extra income to work as they begin the countdown to retirement. "If extra income is used to pay down debt, such as credit cards or a mortgage loan, or it's added to savings, you'll be in a better financial position," Kozak says.
Leonard tells workers who are considering working longer and delaying Social Security to weigh both sides of the tax coin.
"Would you rather have less money and pay less in taxes, or have more money to live the way you want to live, while paying more in taxes," Leonard says. "Personally, I choose the second option."
From US News & World Report