I had a discussion with a friend today about the value of a job. Not the value of a job as a younger person, but the value of a job as a “phased in” retirement. Many baby boomers are facing the question “When should I retire?” Our discussion focused on some options available.
My friend is a professional and has the ability to continue working on a part time basis if he so chooses (earning approximately $75,000 per year). He is 65 years old and his marginal tax bracket is approximately 40%. His estimated social security benefit at full retirement age (age 66) is approximately $2400 per month.
Our discussion prompted some thoughts which I share here. Note that these thoughts are purely from a financial planning standpoint; they do not address the personal satisfaction questions of continued working vs. time use in retirement.
Social Security Benefits
My friend has several choices concerning his social security benefit. He could have chosen to receive his social security benefit at age 62. He did not choose that option for several reasons:
- At age 62, his monthly benefit would have been reduced by 25% (approximately 6% per year for each year of age before his age 66 full retirement age giving him only a monthly benefit of $1,800). That reduction in benefit is generally permanent and would continue for his life span.
- If he continued to work, his social security monthly benefit would be reduced $1 for each $2 he earned in excess of $15,480 (this amount is applicable for 2014 –it changes annually)
- He was not ready to quit working at that age.
At age 66, my friend can choose to receive his full retirement age benefit of $2400 per month. He can continue to work with no reduction in social security benefit regardless of the amount he earns. He has another option at age 66. He can “file and suspend” his benefits which would allow his spouse to collect spousal benefits without affecting his or her future benefits. With a file and suspend election, he would file for his age 66 benefit but choose not to begin receiving his benefit payment. His spouse could begin drawing ½ of his benefit ($1200 per month) without affecting her social security benefits. The suspension of his benefit would allow his monthly benefit amount to increase as outlined in “Age 70” below.
My friend can delay receiving his social security benefit until age 70; if he does, his monthly benefit will increase by 8% per year (or a total of 32%) for each year from age 66 to age 70. His monthly benefit at age 70 would then be $3,168. Note that his spouse could have been drawing spousal benefits for that four years or until she began drawing her own benefit.
Note: This social security discussion is a generalized one; you should discuss your particular circumstances with the Social Security Administration before making any decisions.
There are consequences on my friend’s investment portfolio that should also be considered. His continued earnings of $75,000 per year for 4 years (age 66-70) are money that would not be withdrawn from his IRA. Since required minimum distributions (RMD) don’t start until age 70 ½, that amount could continue to grow tax deferred until he needed it or was required to withdraw for RMD purposes. At a conservative rate of return (the current 30 year US Treasury rate of 3.5%), the future value of not withdrawing for those 4 years is approximately $316,000. That is, his retirement portfolio will be about $316,000 more at age 70 if he continued working until that time.
What to Do?
Retirement is an individual decision that is dependent on many things (health circumstances, life style choices, economic factors, etc.).