Do you want to feel confident about retiring? Participate in a retirement plan. A strong correlation exists between participation in a retirement plan and increased confidence in the ability to retire comfortably according to a report released in March from the Employee Benefit Research Institute (EBRI), a private, nonpartisan, nonprofit research institute that focuses on health, savings, retirement, and economic security issues. The report’s authors found that nearly half of workers without a retirement plan were not at all confident about their financial security in retirement whereas only about 10 percent with retirement plans felt that way.
The report also found that nearly 40 percent of workers have virtually no savings or investments, and nearly 60 percent have a level of debt that they are having troubles crawling out from under. One result is that in 1991 only 11 percent of workers expected to retire after age 65, just a little over two decades later and 33 percent of workers report that they will retire some time after age 65, while an additional 10 percent do not foresee ever being able to retire. According to EBRI, almost 80 million U.S. workers aren’t covered by a retirement plan at all. That leaves many people relying on a single retirement resource—Social Security—for their retirement income.
With an average monthly benefit worth only $1,294, it makes sense to maximize those benefits. There are books and articles (including some on this site) that cover some of the hundreds of strategies available to married couples, previously married singles, and widows for doing just that but the one key decision it involves is just what age you should begin to take your Social Security benefits. Then last week I read a Motley Fool Special Report, called “Make Social Security Work Harder For You” that looked at it from a completely different perspective. They looked at when you should quit working.
In all honesty, most of us will not work until we drop dead no matter what we say today about our future retirement plans. However, there might be reasons to keep working for a couple more years that are less obvious. Here are two:
1.The maximum possible Social Security benefit for 2014 is $2,642. This might make you wonder why the average payout is so much smaller than the maximum payment. Part of that reason is the result of people choosing to collect benefits prior to their full retirement age (FRA) but part of it is based on how much Social Security tax you have paid over the years. For instance in 2014, the government will tax your first $117,000 in income for Social Security purposes. Those people who earn the maximum amount of income over the period of time Social Security uses for benefits earn the maximum payout. That’s the good news. The bad news is that time-period is 35 years.
Good news or bad, most people don’t make the maximum amount when they work. In fact, most people don’t really come all that close at all for the entirety of that time even if just before retirement they do so with regularity. For instance, you paid Social Security taxes when you flipped burgers at the local drive thru but it’s not much of a guess that you certainly didn’t earn your maximum amount during those years. Why does this matter? Social Security looks at your highest 35 years of work, adjusts for inflation and comes up with an average indexed monthly earnings figure. That might mean your last 35 years, but it might not. If you’ve worked exactly 35 years but some of those years you worked part-time while you attended school or raised a family, one of the easiest ways to improve your Social Security payout is to continue to work until you’ve replaced some of those lower paying years with higher paying years. This is one time it’s really useful to sit down with a financial advisor. Someone like Julie Price in our office can do the calculations to figure out if working a couple more years will improve your benefit enough to make it worthwhile.
2.To collect Social Security benefits, you need a minimum of 40 credits (10 years of work). If you have worked off and on but mostly off, you may need only a matter of a year or two to go from no Social Security benefit to a Social Security benefit. Why does this matter if you intend to collect from a Spousal benefit? It may not but it might provide an opportunity to increase a benefit or provide a planning option.
Waiting to collect Social Security is usually in your best interest but not always. Sometimes with Social Security, less really is
more and sometimes not. It’s why a financial advisor is not out of the question if their advice can amount to tens of thousands of dollars in additional benefits over your lifetime.
Let’s say you want to partially retire. If you do so before your FRA, you will lose some of your Social Security benefits ($1 for every $2 you have earned over $15,480). Those benefits will be added on later when you reach FRA but here’s another option. If you wish to cut back on the number of hours you’re working or simply quit outright but aren’t sold on collecting Social Security just yet, allow your Social Security benefits to continue to increase and use that time to draw down your taxable IRA to pay living expenses. This will shrink your taxable assets while allowing your benefits to continue to grow. Again, a financial advisor can help determine whether there are any tax benefits to converting or withdrawing an IRA.
For close to 80 percent of Americans, Social Security is the only retirement income they’ll have. For 64 percent of Americans 65 and older, more than half their income comes from Social Security. Even for those lucky enough to have had employer offered retirement plans and smart enough to have taken advantage of them, Social Security offers significant and important security for later on in life. However, without proper planning, it could be compared to life on Medicare—that is you will have a life but not necessarily a quality life. You can improve that quality by making a choice to make educated decisions about the most important retirement investment you own.