American Financial Literacy Institute provides a lot of educational events for organizations and companies. Subsequently, we meet with many people to discuss their personal situations in greater detail, have questions they want answered, or advice on what they should be doing with their finances. When it comes to conversations regarding retirement issues, a couple of questions come up regularly:
- What happens if we get sick or need long term care during retirement? Can we afford it? Will we be wiped out financially?
- If I want to work while I’m retired, what happens to my social security?
With regards to the first question and getting sick, there are obviously many different outcomes. In a recent report with Fidelity Investments, they discussed a couple retiring at age 65 to age 85 could spend over $260,000 on medical expenses during retirement. Unfortunately, as we get older, we have a greater risk for critical illnesses like cancer, heart attacks, stroke, and many other problems. People also have a greater need for chronic illness protection associated with long term care and assisted living needs. One solution that I have used successfully to help reduce these risks is getting life insurance with “living benefits” protection. This hybrid type of life insurance gives the policyholder access to a portion of the death benefit to help pay for critical and chronic illness. When designed properly this can be a great way to help offset medical costs, and even allow the money from the policy to be used on a tax-free basis. There are rules, exceptions, and underwriting details, but it could be worth considering.
As far as working during retirement, Americans are doing this more and more. Maybe someone is concerned that they haven’t saved enough money, want to stay active, or really just enjoy working. We get asked about social security benefits quite often, and what happens with my social security while I continue to work. It depends on your age and your income, but you can start receiving 75% of your social security payment as early as 62 before your FRA (full retirement age). Full Retirement age now is 66 for people born between 1943 to 1954, and rising eventually to 67 for people born after 1960. You can actually defer until age 70 and receive about 8% more per year.
If you are drawing social security prior to age 66, the Retirement Earnings Test temporarily reduces your social security benefit by $1 for every $2 earned above $16,920. For example, if you earned income of $18,000, your social security payment drops by $540. However, once you reach your FRA (full retirement age), they you get your full social security regardless of what you earn. You need to decide if taking social security is worth it based on what you are making from work, or to keep deferring it. It’s a personal decision because there isn’t one “best choice,” in my opinion, but social security does have a report available “When to Start Receiving Retirement Benefits,” that you can access on the Social Security website to help you make the best decision possible.
As far as social security benefits being taxed, that is a completely different issue. That calculates how much of your social security benefit will be added back into your income tax calculations based off your total income from all sources except a few things. For example:
Single/Individual tax filing $25,000 to $34,000 requires that 50% of your social security be added back into your income tax, and anything above $34,000 means 85% is added back.
Joint filers can earn between $32,000 to $44,000 with 50% of social security added back in, and 85% for everything above $44,000.
Basically: Your adjusted gross income + tax exempt interests + 50% or 85% of social security Equals your combined income for paying income taxes
Social security taxation usually happens if you have other sources of income because about 70% of people aren’t subject to this, so plan carefully. There are also income ideas that don’t effect social security being taxed, so getting professional advice can help you plan what’s best for your situation. If you want more information on anything that we have discussed, feel free to reach me at (602) 571-1035 or email firstname.lastname@example.org