Financial Literacy - Retirement income planning
Should you work in retirement?

To avoid losing Social Security to either income tax or through withheld benefits, York advises those planning to stay on the job past the prescribed retirement age to delay taking their Social Security for as long as possible. The longer you wait, the higher the monthly payout because it's based on your projected life span, which of course gets shorter as you get older.

"Your benefits will increase automatically each year until the age of 70," York says. "If you continue working, you can get the most out of your benefits by waiting until then." At age 70, the payment to which you're entitled is maxed out, so it makes no sense to delay beyond then.

To figure out exactly how much your income will impact your Social Security benefits, check out the SSA's online Retirement estimator.

Pension benefits

Stick around long enough and you might be rewarded with a stagnant or even reduced pension plan, says Richard Johnson, principal research associate for the Urban Institute, a Washington D.C.-based nonprofit that studies social and economic issues.

"In a lot of pension plans, especially defined-benefit plans, your benefits are computed based on a set number of years of service," Johnson says. "If your plan maxes out at 30 years and you work past that number, you're not going to get any additional pension benefits for that last year."

While an extra year's worth of salary will benefit potential retirees far more than losing a year of pension benefits, Johnson adds that in some cases, workers who stay past their prescribed retirement age risk lowering their overall pension benefits.

"In some plans, the benefit is a percentage of earnings during the last years of service, so if you reduce your hours or have lower earnings during your last few years, you could actually reduce your pension benefits," Johnson says. "Before you stay an extra year, you want to make sure your benefits aren't going to go down."

Rather than sticking with a job that will freeze or lower pension benefits, a smarter move may be to max out years of service with one company, get a fiscally comparable job with another company, and then start drawing your pension benefits as well as a new salary, (though be mindful that the new salary and pension benefits may bump you into a higher tax bracket).

Before deciding to stay an extra year, workers should go over their pension plans with a knowledgeable human resources representative and tax adviser to carefully evaluate whether staying on could cost them retirement cash.

Health care options

So you're finally old enough for government-subsidized health care. Congratulations! Those who continue working past the age of 65 have the option of Medicare, their company-sponsored health care plan, or a combination of both. While more health care options (and two monthly health care premiums) should translate to fewer out-of-pocket medical expenses, MetLife's Steele says that workers who enroll in Medicare and a company-sponsored plan can actually wind up paying more.

"As soon as you turn 65, your health insurance company is going to try to make Medicare your primary provider," says Steele. "You have to be careful of that. Whereas certain treatments or office visits were covered in full with your corporate plan, they may not be covered under Medicare. You could also have higher deductibles and co-pays."

Many workers over 65 opt for two health care policies -- Medicare combined with a supplemental company-sponsored insurance plan. Yet the company-sponsored plan alone might be better. For example, workers who enroll in Medicare Part D, the prescription drug plan, can get up to $2,700 worth of prescription drugs covered before a "coverage gap" starts, requiring plan holders to pay for prescriptions out of pocket until the end of the year or until "catastrophic coverage" kicks in -- when costs reach $4,350 or more. Workers who stay enrolled in the regular company-sponsored health care plan without Medicare might have those costs covered, but those who switch to Medicare plus a supplemental insurance plan could wind up paying out of pocket.

"It's very possible that two health care plans can give you less coverage than one," Steele says. "Workers eligible for Medicare need to figure out which health care insurance option works best before staying in the job."

One way to avoid double-paying is to delay Medicare Parts B and D until after your company-sponsored coverage (or company-sponsored coverage through your spouse) runs out, according to Joe Kuchler, spokesman for the Centers for Medicare and Medicaid Services.

Eligible workers can put off enrolling in Medicare Part B without penalty for up to eight months after employer-sponsored or group health care coverage ends. Those who wait until after that time period won't be able to enroll in the Part B program until the next "general enrollment period," which is Jan. 1 through March 31 each year. Benefits won't kick in until the following July 1, and you may have to pay a late enrollment penalty.

Delaying Part D works in a similar fashion, with a few different restrictions. Employees can delay enrolling in Part D without penalty for up to 63 days after employer-sponsored coverage or a group plan ends. Those who miss the window will have to wait until the next general enrollment period, which runs from Nov. 15 to Dec. 31 each year, with benefits beginning the following Jan. 1. Late fees also apply. If you have questions about delaying Medicare benefits, contact the Medicare hotline at 800-633-4227.

The trick to finding the right time to step out of the work force is to weigh the trade-offs of tax, pension and insurance pitfalls against the benefits of an extra year of income, Seibert says. "Most people are going to benefit from staying in the work force longer, but it's crucial to make as informed a decision as possible," he says. "They only have one chance to get retirement right."


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