Ready to Retire? "YES" What will your Taxes Say?
There are a few decisions that will impact your financial plan as much as when you retire.
Every additional year of work past age 62 produces income that can facilitate a delayed filing for Social Security. Each of those years can translate to more saving and investing—and fewer years living on those savings. They may also provide more years of employer-subsidized health insurance and lower lifetime health care expenses.
Most people think of age 65 as the traditional point for hanging it up, but actual retirement ages are all over the map, judging by Social Security claiming data. In 2018, 35% of the people who claimed benefits were 62; 25% were full retirement age (66); just 13% claimed at age 67 or later. More affluent people—who are less likely to work in physically demanding occupations—are more likely to work well past that age.
Public opinion polls show that people expect to work longer in response to the recession—a recent survey by TD Ameritrade found that 37% of baby boomers and 39% of Gen Xers said they had delayed retirement or were considering doing so in response to the pandemic.
But whether you'll be able to pull that off is another matter entirely. Even before the pandemic, numerous research studies found that roughly half of the workers retired earlier than planned due to ill health, family responsibilities, or job loss. All of those factors will be on steroids for the foreseeable future as the nation struggles to get the coronavirus under control and dig out from a severe economic slump.
Against that backdrop, it's easy to see that the pandemic will scramble retirement timelines for millions of Americans. The economic uncertainty adds new elements of the risk just as high as the risk near-retirement individuals face in the stock market—perhaps more significant. And the fact that a health crisis induces this recession adds a unique dimension for older workers. In a typical recession, the unemployment rate for older workers runs slightly lower than the general jobless rate, mainly due to their long tenure and job stability. But the jobless rate for older workers has been running higher in this recession, especially among those aged 65 and older.
Guidance from the Centers for Disease Control and Prevention states that adults over 65 are at higher risk of severe illness from the coronavirus than others. That complicates the prospect of a return to the workplace. Evidence already is surfacing that the pandemic is producing a wave of early retirements. A report published recently by three economists found that among people who had left the labor force through early April, 60% said they were retired, up from 53% in January, before the pandemic. The most substantial increase was among people over 65, but nearly half of this group were 50 to 65.
Data from the Bureau of Labor Statistics show that the highest jobless rates for workers over age 55 are leisure and hospitality, transportation; education; and wholesale trade. Older professional services and health care workers also are experiencing very high jobless rates. So far, finance, government, and information are doing better.
The Congressional Budget Office is projecting that the gross domestic product's real annual growth for this decade will be 3.4% lower, on average, than expected in January. The annual unemployment rate, projected to average 4.2%, is now projected to average 6.1%.
We are especially concerned about small businesses. The New York Times recently reported a wave of small business closures that began in March, and many experts think that's just a start. A poll of consultants to workplace plans earlier this year by the National Association of Plan Advisors concluded that over 200,000 small-business plans are at risk of termination from the pandemic.
Emergency response
If you have already have lost your job, this is an excellent time to revisit earlier strategies.
The question on the table will be: Where do I find income to live on now? Answering this question should lead to a conversation about the interplay of Social Security and retirement savings.
Conventional pre-pandemic wisdom was to delay filing as long as possible to boost annual income. To review the bidding, filing at full retirement age (FRA) gets you 100% of your earned benefit; filing earlier than that age will reduce benefits as much as 6.7% annually, depending on when you claim. For example, filing at 62 would yield only 72% of the full advantage. Filing after FRA yields an 8% boost for every 12 months of delay up to age 70.
That's a strong argument for the delay—especially considering the possible tax efficiencies associated with drawing down tax-deferred savings in the early years of retirement when tax brackets are lower. The argument is even more persuasive considering the current low brackets under the Tax Cuts and Jobs Act, which expire in 2025.
But pandemic risk could give some reasons to file earlier than later if their savings are modest and will be needed for emergency purposes. Either for themselves or family members who may also face job loss and economic stress in the next few years.
Plan retrofits
The current outlook also should be an opportunity to revisit other aspects of your plans, including.
Equity exposure? Forecasting the market is a fool's errand, and I never indulge. But as Allan Roth, a CFP and head of Wealth Logic in Colorado Springs, Colo., pointed out in a recent edition of a podcast, "Most of the clients who come to me have already won the game, or they're winning it—so their need to take risk is low. Dying the richest person in the graveyard is not the goal."
Health insurance strategies. A recent study found that 5.4 million American workers lost their health insurance just between February and May. Medicare eligibility still starts at age 65, so older clients who lose jobs below that age will need to navigate their options under the Affordable Care Act—assuming that law withstands the latest assault in the courts. You can add value by providing help in figuring out ACA coverage and also for Medicare, which presents, unfortunately, complex consumer choices.
Pare debt. Debt burdens have been rising among near-retirees, especially boomers born from 1951 to 1960. That can squeeze standards of living and make you more financially fragile.
We work with clients to pare or eliminate debt, especially high-rate credit cards or student loans. It's also an excellent time to consider accelerating or getting rid of mortgages, considering the gap between safe rates of returns on CDs and typical mortgage rates. To obtain more information, schedule a free strategy planning consultation by emailing info@cwa-thetaxstrategists.com.