Pat Sterner, who runs her own nonprofit business consulting firm in Duluth, Minnesota, would like to retire and spend more time kayaking on Lake Superior. In the summer, she says, her neighbors always “knock” on her door to get her out.
But even though she would like to take on fewer customers, she’s not quite ready to close the store yet. “My kids laugh and say, ‘Are you really retiring?'” said Ms. Sterner, 66. “It’s a little unnerving. I’d like to leave the door ajar.”
Ms. Sterner’s concerns—about having enough money, leaving the business she’s built—mirror those of millions nearing, but not quite ready, for full retirement.
For many, reaching retirement age is not simply a matter of two weeks’ notice. You may want to extend your career or run down your job or business. If you’re able, you may want to keep working until you’re 70 (and beyond), when you’ll receive the largest Social Security benefit possible.
These middlemen are slow-walk planning to arrive the moment they are out of work. It involves a delicate jigsaw puzzle of decisions, strengthening the nest and financial calculations. This temporary time also provides a meaningful time for reflection and short-term planning.
About 55 million Americans are now 65 and older, and those born at the height of the baby boom will reach that milestone this year. While a combination of the pandemic, job disruption, inflation and higher medical costs keeps retirees stuck, millions remain in work as they transition into full retirement. Whether you’ve already chosen your quit date or are considering options, there are several things to consider.
Social Security Benefits
The age at which you take Social Security is critical to tax and investment portfolio planning, so make some numbers about benefits at different ages. The good news is, you won’t be charged a Social Security “wage penalty” if you work and receive benefits at or after age 66½, which for most people is what the Social Security Administration calls full retirement age. Sure, you can get benefits anytime after age 62, but the earlier you retire, the lower the monthly payment.
The records look back at your best earning years and forward to the age at which you will use them to calculate your monthly check. While many financial advisors advise their clients to wait as long as possible before coaxing Social Security, only a handful do. About 5 percent of people surveyed by wealth manager Schroders last year said they had Social Security by age 70, when the highest possible benefit is paid. That often leaves a gap to fill.
Keep in mind that Social Security gets complicated when you consider partner benefits, which are generally as much as half of the other beneficiary’s primary insurance amount, or the amount you would receive at full retirement age. You can apply for the partner allowance from the age of 62, but you can also wait to apply for a higher benefit later. It is also possible to receive a higher payment based on your own record for lifetime earnings. You need to run some numbers to see how best to maximize payments. Divorced people may also qualify for spousal maintenance under certain circumstances.
You also need to do some Medicare planning before you turn 65. There are a number of programs you should know about, so spend some time on medicare.gov. Also keep in mind that Medicare premiums are tiered — there are six tiers — and based on income: the more you earn, the higher the premium. Your tax return status is also important in pricing.
Of course, none of the Medicare components offer 100 percent coverage, but you can purchase additional Medicare insurance, known as Medigap, through private insurers. Premiums vary widely depending on how much of your out-of-pocket expenses you want to cover, your age, and whether you smoke. Medicare Advantage plans may also cover some out-of-pocket expenses.
At the very least, estimate your benefits and out-of-pocket insurance costs at different ages. You must strike a balance between maximizing Social Security and tapping into other savings to reach your desired fixed retirement date. Another important factor in Social Security planning: your health and longevity. Those who can wait up to 70 years for retrieval are generally in relatively good health and do not face serious chronic illnesses.
“A strong consideration is your family history and longevity,” says Nicole Strbich, a certified financial planner at Buckingham Advisors in Dayton, Ohio. “We include Medicare planning with clients as part of their retirement conversation. Understanding the timing needed to file for benefits and the expected costs — the expected rate of inflation for those costs — and the increased costs for higher-income individuals, are important components of a retirement plan.
A phased retreat
After you run some numbers on Social Security and Medicare, you can create a timeline. Your employer can even help you with “phased” retirement programs, where you gradually reduce your hours to a certain year.
These programs capitalize on a long-standing trend of workers over the age of 65 and include those who are not yet ready to fully retire. Although the employment rate for those 65 and older changes from year to year, it is about 19 percent, according to data from the Bureau of Labor Statistics, compared to a historical average of nearly 17 percent.
There are many reasons for retiring. In many professions, improved longevity means being able to work longer. Many find meaning in work, so they want to move on. Others may need to save more, as guaranteed defined benefit plans have become the exception, not the rule. Many employees simply want to take advantage of the extra amount of annual catch-up money they can save on 401(k)-style plans.
While phased retirement programs are increasingly desirable in the workplace, they are also rare. According to the Society of Human Resources Management, only about 15 percent of employers offer some sort of staged retirement, while about 6 percent offer a formal program, although you may be able to negotiate a staged plan yourself.
Financing your way out
Planning is essential. One of the first things Ms. Sterner discussed in Minnesota with Sam Brownell, a chartered financial analyst with Stratus Wealth Advisors in Kensington, Maryland, was her income and expenses. “What are my expenses and how can they change?” was one of the first questions they had to answer, and she’s still trying to answer it.
On the income side, she also needed to know, based on her annual expenses, how her reduced income might require withdrawals from her SEP-IRA, a self-employed retirement plan.
Mr Brownell (who is also her cousin) said a decision to wait until age 70 was important because you need to “look at your cash flow during that time. The increase in Social Security benefits depends on the person’s year of birth,” he said. “For example, if you were born after 1943 and you postpone your benefits until age 70, your annual increase is 8 percent per year.”
Another part of the transition is tax planning. Withdrawals from defined contribution plans such as SEP-IRAs and 401(k)s are taxable at the federal level, while withdrawing money from a Roth IRA is not – if you are at least 59 and have held the money in the account for at least five years.
There’s also a tax wrinkle down the road with defined-contribution plans: The Internal Revenue Service requires most people to start withdrawing money into the minimum benefits requirement by age 72. However, that rule does not apply to qualified Roth withdrawals.
Converting from a conventional IRA to a Roth, which will generate a one-time tax bill from the IRS, may be in order, depending on your income. Mr. Brownell advised employees to consider this move well in advance of retirement to save taxes later.
Roth converts may pay lower federal income taxes in their ‘austerity years,’ he added. Because of the tax bill with a Roth conversion, you should talk to your tax or financial planner, or run numbers on an online calculator, to see if it makes sense for you.
Do-it-yourself or get help?
You can of course arrange the transition yourself or enlist professional help. Finding a paying-only certified financial planner is a good start. It is possible to find a planner that works for a flat fee or hourly rate. Do not hire anyone to sell you investment products.
Without a doubt, it’s always a good idea to raise your nest egg during your in-between period. Before 2022, you can contribute $20,500 to your 401(k) or other defined contribution plans. That’s $1,000 more than last year. People over 50 can add $6,500 in catch-up fees.
More importantly, one of your top questions should be, “What do I really want to do and how do I get there?” Whether you are partially or fully retiring, it helps to have some specific goals. For Ms. Sterner, one of those goals is having more time to interact with her local network. “I’ve worked nationally and internationally throughout my career,” she says. “I really enjoy volunteering in my local community.”
Ultimately, your quality of life is the biggest factor. In Ms. Sterner’s case, that means “managing my finances, so instead of arguing with customers, I can argue lake trout out of my kayak.”
