In the past, retirement planning used to involve two planning stages: the accumulation of assets and the distribution of assets. Nowadays, there may be three periods to consider: accumulation, transition and distribution. “Transition” can be defined as the period between full employment and full retirement when a person is working on a reduced or part-time basis.
What are some reasons to consider working a little longer?
Working gives many people a purpose and a sense of self-worth—two benefits that can be more valuable than money in some cases.
Working just a few extra years also prolongs the start of the distribution period and enables you to accumulate more savings, both of which can go a long way in providing more security in retirement. This becomes especially important when you consider that life expectancies are rising and you may need to fund a longer retirement than your grandparents, or even parents, did. For example, there is a 25% chance that at least one member of a couple who have both reached age 65 will live to the age of 96.1 As medical technology and healthier lifestyles keep you living a long time, you need to make sure your portfolio lives as long as you do.
Continuing to work in the transition years can also provide one additional advantage—it might enable you to receive medical benefits of higher quality than what you would receive as a retiree from your job or from Medicare. This strategy can go a long way in reducing the impact on your portfolio of unforeseen medical bills in early or mid retirement.
Caveat. While we have explored the positives of continuing to work in the transition years, you also need to consider the negatives. One negative is the impact on Social Security benefits. If you decide to start receiving Social Security benefits at age 62, you will be penalized with a reduction in those benefits for any income you receive from working until you reach normal retirement age (typically between age 65 and 67). Proper planning is needed to ensure that you receive the maximum benefits coming to you. In addition to a reduction of benefits, Social Security benefits are taxed if you make more than a certain amount each year from earned and investment sources. The good news is that after reaching the normal retirement age, there are no restrictions on working, and your Social Security benefits will no longer be reduced. It may be best to plan this out with your financial advisor so as to put more money into your pocket and less into Uncle Sam’s.
1Source: Mortality rates— Annuity 2000 Mortality Tables—Transactions, Society of Actuaries, 1995–1996 Reports.
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