You can delay retirement well past 65 or 70, but if you’re an older worker, you should not postpone retirement planning.
Whether you’ll keep a job after the typical retirement age or you’re already in the retiree demographic, your financial planning will look a little different than those whose careers stop at an earlier age.
The one thing both groups have in common is the need for clear information, even if the news isn’t great, according to Craig Copeland, Director of Wealth Benefits Research at the Employee Benefit Research Institute.
“Worker’s confidence appears to be overoptimistic, as the actions of workers are not in line with the confidence such as not calculating how much they need for retirement or having sufficient savings to supplement Social Security,” Copeland told The Atlanta Journal-Constitution.
“Also, some workers have debts that prevent them from making any headway into preparing for retirement. The recent high inflation and stock market volatility must also be accounted for as they prepare for retirement — work longer or stay the course.”
To avoid pitfalls, consider these retirement planning strategies from Copeland and financial professional Greg Phelps, CEO of Canton-based Griffith & Werner,
Know your numbers
In the IRI’s survey of employed Americans between ages 40 and 73, around 40% of these older workers overestimated how much Social Security they’d receive. And only 26% of those surveyed online were able to accurately anticipate how much income they’d need in 10 years to keep their current standard of living.
Anticipate inflation
Insured Retirement Institute’s survey on Retirement Readiness for Older Workers 2021 reveals three key findings: the need for improved savings behavior, unrealistic retirement income expectations, and indications of strong interest in annuities.
The study assumed a 3% inflation rate, a key factor for those who want to plan a secure retirement.
“Understanding the erosive effect of inflation on spending power is critically important,” vice president of research at Insured Retirement Institute Frank O’Connor said in a press release. IRI conducted the survey, Retirement Readiness for Older Workers 2021.
“And consumers need to understand the importance of having a portion of retirement investment portfolios in risk assets that have a better chance of keeping pace with inflation than ‘safe’ investment options.”
Realize you may not be able to continue working in retirement
While it’s fine to plan to keep working well into your 60s or 70s, it’s crucial to have a plan B.
The 2021 Retirement Confidence survey from the Employee Benefit Research Institute found that while some 68% of workers anticipated continued earnings from employment during retirement, only 23% of retirees actually had that income materialized.
Nearly half of those surveyed believed they would segue gradually into retirement, but almost 70% experienced an abrupt stop in working. Reasons range from illness to shifting needs at their workplaces.
Understand how to convert retirement plan savings to income
After years and perhaps decades of concentrating on how to save money for retirement and selecting appropriate investments and funds, an older worker’s focus should be shifting to ways to convert those savings into income, Copeland said.
“Understand how much the savings can provide and how long they will be available,” Copeland said. “Accumulating assets is important, but for older workers, learning how to spend the assets down to fund retirement becomes paramount.”
Check out annuities
Fewer than 30% of the respondents in the IRI study were able to correctly determine how much they could safely withdraw from a diversified retirement investment portfolio. If you have a similar lack of understanding, you might deplete your retirement savings at a too-rapid pace, O’Connor said.
For that reason, he recommended annuities as a potential part of a solid retirement plan for older workers, because they allow an investor to use “a portion of savings to lock in lifetime income is a disciplined way to deploy assets and guard against overspending.”
Avoid potential taxes and Medicare increases
If you’re relying on what you know from previous decades about post-retirement taxes, you should probably get a refresher.
“Both the cost of Medicare and the way Social Security is taxed are way more complicated than they used to be,” Phelps said.
For example, while Medicare used to be a flat rate once you reached age 65, now freelance income can affect how much you pay for Medicare Part B and Part D.
The other complication is referred to as provisional income. If you’re figuring your full Social Security income into your retirement funds, it can be a surprise when a portion of your Social Security income gets taxed because you made too much as a freelancer or contractor.
Half of the Social Security benefits reported on the 1099 form are added to the calculation of taxable amounts of provisional income.
It doesn’t take a whole lot of income to lead you to pay taxes on a portion of your Social Security or pay more for those portions of Medicare, Phelps said.
Consult an income and tax planner ASAP
“An expert can help you determine how to generate revenue as tax-efficiently as possible,” Phelps said. “You may want to pay for that type of tax planning just once, or you may want someone to advise you annually. But the savings from the professional’s advice should always pay for itself in money saved on taxes.”
Phelps and O’Connor recommended at least one session with an income planner, too.
“They should be helping you figure out a plan that will help you increase your income without losing the gains to increased taxes or Medicare expenses, among other factors,” Phelps said.
“This should be someone who’s helping you find your path, and ways to change your habits, not someone who sends you off with only a specific product. The plans for revenue-generating and financial habits, that’s where the good outcomes come from.”
Value yourself
“The best asset you have is you,” Phelps said.
“Anyone who has a skill doesn’t have to hang their head because they don’t have $1.1 in their 401K. You can continue to generate revenue, you just want to do it in the most financially efficient way possible.”
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