Smart Financial Moves If You Work Late in Life

Working past retirement age can provide an added boost to your retirement savings if you follow these steps.

(Image credit: F. und T. Werner)

Deciding to work past "normal" retirement age offers tangible advantages—a fatter nest egg, bigger Social Security benefits and, for some, a sense of personal satisfaction. Staying in the workforce later in life can open up opportunities to boost your financial security, but it can also present a few pitfalls to watch out for. Take the following steps to ensure that staying on the job, even into your seventies, pays off.

Rein in your tax bill. Even if you are still collecting a paycheck, retirement income streams will turn on, and your income will likely spike. Once you hit age 70, your Social Security benefits stop growing and there's no reason not to claim the money. Until then, your benefits rise by ⅔ of 1% a month for each month you wait to claim them until age 70. If your full retirement age is 66, claiming your benefit at 70 provides a 32% boost to your monthly check.

When you hit age 70½, you must start required minimum distributions from retirement accounts. You can delay RMDs from a current 401(k) plan—but not from IRAs or old 401(k)s—as long as you are working, if you don't own 5% or more of the company.

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With new sources of income kicking in, you could be in for an unpleasant surprise from Uncle Sam. Your wages and your RMDs can cause up to 85% of your Social Security benefits to be taxable. Plus, your RMDs are generally fully taxable, too.

Plan ahead for this "tax torpedo," says Mike Piper, a St. Louis, Mo., certified public accountant and founder of the Oblivious Investor (opens in new tab) website. Consider converting money from a traditional IRA to a Roth IRA when you're younger, he says. That way you pay taxes at your current tax rate, rather than your future rate.

Look for moves to lower your tax bill. Your tax rate could bounce around, depending on how long you and your spouse work and when you each collect benefits or start RMDs. In a lower income year, delay charitable contributions or other deductions for a later year with an expected higher rate, Piper says.

Keep stashing money away. Earning wages means you can keep contributing to traditional IRAs until the year you hit 70½ and to Roth IRAs at any age, if you fall below certain income thresholds. You can put a total of $13,000—or the amount of your taxable compensation, whichever is lower—into your IRA and your spouse's IRA in 2017 if you're both 50 and older. And you can keep contributing to your current employer's 401(k); the limit for 2017 is $24,000 for those 50 and older.

Deductible traditional IRA contributions and pretax 401(k) contributions will help rein in your tax bill, too. Roth contributions won't help your tax bill now, but boosting your pot of tax-free income could cut future tax bills or provide a tax-free legacy for heirs.

Pay attention to your pension. If you have a defined benefit plan, scrutinize the details of your plan. Check to see if your pension is based on, say, your five most recent years of earnings. In that case, you’d likely lose benefits by working part-time at the end of your career, says Richard Johnson, director of the Urban Institute’s program on retirement policy (opens in new tab).

Also, some pension plans won't increase benefits for working past 65. In some cases, you can't collect a pension until you leave your employer. If you are eligible to retire at 65 but stay on the job until 67, you could forfeit two years' worth of checks. Once you leave your employer, you can collect your pension even if you work somewhere else.

Ask if your employer offers a phased retirement arrangement that would allow you to work part-time while receiving a partial pension. Or perhaps ask your employer if you can retire, take your pension and return to work as an independent contractor.

Time your Medicare decisions. Generally, you need to sign up for Medicare Part A, which is free, at age 65. You can delay signing up for Medicare Part B if you remain on the job and are covered by your employer's health plan. But be sure it's the primary payer, which it generally is if your company has 20 or more employees. You could end up on the hook for big medical costs if your employer plan considers Medicare the primary payer and you weren’t enrolled.

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Mary Kane
Associate Editor, Kiplinger's Retirement Report
Mary Kane is a financial writer and editor who has specialized in covering fringe financial services, such as payday loans and prepaid debit cards. She has written or edited for Reuters, the Washington Post, BillMoyers.com, MSNBC, Scripps Media Center, and more. She also was an Alicia Patterson Fellow, focusing on consumer finance and financial literacy, and a national correspondent for Newhouse Newspapers in Washington, DC. She covered the subprime mortgage crisis for the pathbreaking online site The Washington Independent, and later served as its editor. She is a two-time winner of the Excellence in Financial Journalism Awards sponsored by the New York State Society of Certified Public Accountants. She also is an adjunct professor at Johns Hopkins University, where she teaches a course on journalism and publishing in the digital age. She came to Kiplinger in March 2017.