3 Things to Know If You're Planning to Work in Your 70s
Although many workers aim to retire during their 60s, these days a growing number of Americans are working or planning to work until 70 and beyond. In fact, in a study by human resources consulting firm Willis Towers Watson, almost 25% of Americans say they aren't planning to retire until age 70 or older. If you're thinking of extending your career into your 70s, here are a few things to be aware of.
1. You'll still face required minimum distributions
If you have a traditional IRA, you should know that the money in that account can't just sit there indefinitely. Rather, you'll need to start taking required minimum distributions (RMDs) once you turn 70 1/2. Your first RMD must be taken by April 1 of the year after the year you turn 70-1/2, and subsequent RMDs will be due by the close of their respective calendar years.
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Though the exact amount of your RMDs will depend on your account balance and life expectancy, failing to take your withdrawals in full will result in a penalty equal to 50% of the amount you neglect to remove from your account. So if, for example, your RMD amount is $8,000 and you don't withdraw it by the appropriate deadline, you'll lose $4,000 off the bat.
Working full-time at 70 1/2 won't exempt you from taking RMDs from an IRA, so be sure to pay attention to deadlines to avoid getting penalized. That said, you might manage to avoid RMDs if you have a 401(k). If you have a 401(k) plan through your employer and are still working for that employer when RMDs kick in, you can postpone taking them until your work relationship is terminated. This assumes you don't own 5% or more of the company sponsoring your 401(k).
2. You'll get no additional incentive to delay Social Security
Though you're eligible to collect your Social Security benefits in full upon reaching your full retirement age, which, for today's older workers, is 66, 67, or somewhere in between, holding off will give those benefits an instant 8% boost per year. If you're planning to work into your 70s, it pays to take advantage of this opportunity, especially if you're earning a full salary and don't actually need the money. But once you reach age 70, you might as well file for Social Security and start collecting your benefits -- even if you are working. That's because delayed retirement credits don't accrue past this age, so you really have nothing to gain by holding off any longer.
If you end up taking Social Security at 70 but don't have a specific use for that money, you can always invest it, thereby boosting those benefits yourself. In fact, if you have a Roth IRA, you can contribute a portion of your income even if you're well into your 70s, and by doing so, you'll get an opportunity to grow your money tax-free.
3. Your taxes might explode
All workers are used to paying taxes on their income, regardless of age. But if you're planning to work into your 70s, you may want to brace yourself for a sizable increase in taxes once your RMDs and Social Security benefits kick in. As soon as those payments get added to what's conceivably a reasonably high salary to begin with (as most people earn more later in their careers), you're likely to see an increase in your marginal tax rate, which means you'll be liable for more taxes on your highest dollars of earnings. Furthermore, if you're bringing in a fair amount of non-Social Security income, you might get taxed on up to 85% of your monthly benefits.
While some of these taxes may be unavoidable, preparing for them can help you avoid unpleasant surprises down the line. Another option is to think about converting some of your traditional IRA assets over to a Roth IRA. This will help you avoid RMDs and taxes on withdrawals.
Though working into your 70s does introduce a few more pitfalls to navigate, there are still plenty of good reasons to work longer. Not only will you get a chance to reinforce your nest egg, but you'll avoid dipping into your savings sooner, thus leaving yourself more money later on in life. Just as importantly, studies have shown that working longer is good for your health, so if you enjoy what you do and have an opportunity to keep at it, you might as well remain employed for as long as you can.
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