The first of nearly 80 million baby boomers this year will reach the magic age of 59, when they can take distributions from tax-deferred retirement plans without incurring a 10 percent early withdrawal penalty. But don't expect everyone to rush for the office door.
Some nine out of ten current employees expect to continue working in some capacity after they retire, according to a 2004 retirement study by the Gallup Organization. Those employees are part of a trend toward phased retirement, a gradual transition from work to leisure that can ease the burden on retirement savings and help older Americans feel productive.
But there are potential pitfalls as well as advantages. Consider:
Cutting your hours could reduce your pension payout. Though most companies have been phasing out defined-benefit retirement plans, many older workers are still covered by them, which may provide lifetime annuity payments based on the level of your salary during your final years with the company. That could be a problem if you scale back hours and income.
However, employers are increasingly finding they need to retain valuable older employees and as a result are adjusting their pension formulas. for example, by basing retirement benefits on the five highest-earning years during the past decade. If you're expecting a pension, make sure you know the rules.
Health benefits could be affected, too. Starting at age 65, Medicare will cover many of your health care costs, but you'll also need supplemental coverage. Many companies have reduced or eliminated health insurance for retirees, leaving them with a significant additional monthly expense. Check your company's policy to see how many hours you'll need to work to maintain benefits.
Easing into retirement can make a big difference financially. In the study, some 35 percent of employees cited a need for extra income as at least part of the reason they expect to stay on the job in some capacity, up from 27 percent in 1998. Delaying retirement ' or working part time to postpone tapping a retirement nest egg ' can be a big help if you're behind in saving for life after work.
Suppose you are 50 years old, have amassed $200,000 in a tax-deferred retirement plan, expect to earn a hypothetical return of 6 percent a year on your savings, and want to retire with $2 million at age 66, when you'll be eligible to receive full Social Security benefits. You'll need to set aside about $58,000 a year to reach your goal.
However, consider what would happen if you worked part time for five additional years, earning enough so that, bolstered by Social Security, you maintain your current income. By waiting until age 71 to retire, the annual savings requirement to reach $2 million would drop to $33,000. (For convenience, these examples assume savings would compound without taxes; in fact, the annual amounts required exceed yearly limits on contributions to a 401(k) or other tax-deferred plan.)
Work is not a bad thing. Many individuals will continue working because they want to, others because they don't see a choice.
Mitch Anthony, author of The New Retire-Mentality, says, 'Freud observed that love and work were essential to finding meaning and happiness in life. Understanding how these two forces work together can lead to lasting happiness. Lasting love requires work. Lasting work requires that we love what we do.'
According to Anthony, the challenges are: Seeking retirement with meaningful work as a part of it; knowing that work can play a significant role in your life at any age; and finding work that you can enjoy and that keeps you sharp and involved.
Taking the time to think about what you really want to do will help make for a smoother transition into retirement.
Securities offered through Linsco/Private Ledger. Member NASD/SIPC and an Investment Advisor