Postponing Retirement? Don't Postpone Planning for It!

Dear Carrie,

I'm turning 65 in a few months, and still working. I have no immediate plans to retire, but I'm wondering what I should be thinking about as I navigate through this transitional time over the next few years.

—A Reader

Dear Reader,

Your question is right on target with today's retirement reality as people are living—and working—longer. According to the Bureau of Labor Statistics, in 2016, 26.8 percent of 65- to 75-year-olds continued to work, and this percentage is expected to go up to 30.6 by 2026.

There are varying reasons for postponing retirement, from economic stability to personal fulfillment. But whatever the reason, and however long we plan to remain working, there are retirement-related financial concerns we still need to deal with in our sixties. So you're smart to be planning for this eventual transition now to avoid potential snags down the road. Here's what I suggest.

Just because you reach "full retirement age" (FRA) doesn't mean you have to collect Social Security benefits, especially if you're still working. The longer you wait, the more your benefits will increase—up to age 70.

Monthly benefits increase between six and seven percent for every year you delay from age 62 to your FRA, and then grow eight percent a year between your FRA and age 70. If you're healthy and longevity runs in your family, you stand a good chance of increasing your lifetime benefit by postponing your start date.

If you've already filed for Social Security, you'll be automatically enrolled in Medicare Part A and Part B at age 65. But if you haven't, you have a choice to make.

Most people will benefit by enrolling in Medicare Part A at age 65 whether or not they continue to work. There are no premiums and enrolling now will help you avoid potential penalties or delays down the road.

If you're covered by your employer's plan and your company has 20 or more employees, that plan will remain your primary coverage. If you work for a company with fewer than 20 employees, Medicare will be your primary insurer.

Another caveat: Once you enroll in any portion of Medicare, you can no longer contribute to a Health Savings Account. So if you're relying on your HSA to boost your savings, you'll need to postpone Medicare.

If you work for a company with fewer than 20 employees, you're probably best off enrolling in Medicare Part B and Part D when you turn 65. But if you work for a larger company, you may well be better off sticking with your employer plan and enrolling in Medicare once you retire. Research costs and coverage before you make a decision. 

Later, once you leave your job, you will generally have eight months to enroll in Part B or face a penalty. Part D also has a late enrollment penalty if you go more than 63 days without "creditable" prescription drug coverage. Creditable means that your existing insurance is expected to pay as much as the standard Medicare prescription drug coverage.

No one should ever walk away from an employer's 401(k) match. But beyond that, it can make sense to save much more. The good news is that as long as you're working, you can continue to contribute the legal maximum ($27,000 in 2022) to your 401(k) regardless of age. If you anticipate being in a high tax bracket come retirement, you might want to consider a Roth 401(k), if available.

You can also contribute up to $7,000 to either a traditional or Roth IRA as long as you have earned income, although in 2022 Roth IRAs are restricted to those who earn less than $214,000 (combined income for a married couple filing a joint return) or $144,000 (single). 

Note that the 2019 SECURE Act extended the age limit for contributing to a traditional IRA from age 70½ to 72.

The CARES Act passed in March of 2020 has temporarily suspended all required minimum distributions (RMDs) for 2020, regardless of age. This includes 401(k)s and traditional IRAs.

Starting in 2021 when the CARES Act expires, we will revert back to the RMD rules established by the 2019 SECURE Act. If you didn't turn 70 ½ by 2020, you can wait until the year in which you turn 72 to start taking your required distributions. Also note that earning a paycheck means you can delay taking a required minimum distribution (RMD) from your 401(k). As long as you're working (and you don't own more than 5% of the company), that requirement is waived until April 1 of the year you retire. There are also no RMDs for Roth IRAs at any age.

Conventional wisdom says we should pay off our mortgages before we retire. To me, it's important to look at your mortgage in the context of your complete financial profile.

Before you rush to pay off your mortgage, especially if that involves selling securities or will reduce your liquidity, I'd consult with your financial advisor and think through your options.

Switching from saving to spending and depleting what you've worked so hard to build can be a difficult transition. My advice is to take it slowly and create a safety net. So before you stop working:

• Review your net worth statement to understand exactly where your stand.
• Make a retirement budget and stash away a minimum of a year's worth of cash.
• Review your portfolio to make sure you have the appropriate balance of risk and safety. 
• Consult with your financial advisor to create a tax-efficient drawdown strategy.

As we're healthier and living longer, it's great we can choose to work for as long as it's financially and personally rewarding. But planning carefully for the eventual transition to retirement has its own rewards, and can make the next phase of life even more fulfilling.

Have a personal finance question? Email us at askcarrie@schwab.com. Carrie cannot respond to questions directly, but your topic may be considered for a future article. For Schwab account questions and general inquiries, contact Schwab.