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What do you envision your retirement process looking like? Traditionally, people worked at a steady job for a long time, sometimes even earning a pension, and then left the workforce for retirement when they were ready. But this type of traditional path to retirement has become very uncommon.
In fact, not only are pensions few and far between today, people also tend to change jobs much more often. And retiring directly from a full-time job has become pretty rare, with data from the National Bureau of Economic Research showing that just 37% of all workers took this route to retirement. The rest took other paths, most often switching to part-time work before finally giving up a job for good.
If you're one of the millions of Americans who are carving out your own road to retirement, here are a few tips.
Image source: Getty Images.
If you leave your full-time job and are thinking about claiming Social Security benefits, you need to be aware that part-time work could affect the amount of your checks. If you've hit your full retirement age (FRA), which is between 66 and 67 depending on birth year, you can work as much as you want and your benefits will stay the same. But if you haven't yet hit FRA, your benefits will be reduced if you earn too much.
In 2020, if you won't hit your FRA all year, you can earn up to $18,240 and see no reduction in benefits. But if you earn more than that, benefits will be reduced by $1 for each $2 earned. If you'll hit FRA in 2020, you can earn up to $48,600 without benefits being affected. But if you exceed this threshold, your benefits will be reduced by $1 for each $3 earned. Only the months prior to hitting FRA count toward the maximum earning threshold.
If your earnings are high enough, you could end up losing your entire benefit amount. But the good news is, you do eventually get back any money withheld from your checks. When you hit FRA, your standard benefit amount will be recalculated to account for benefits you didn't get and you'll receive a higher future income.
If you're still earning money from a job, you're allowed to continue making contributions to a 401(k) and to a Roth IRA. And thanks to the SECURE Act, which was recently signed into law, there's no longer an upper age limit on IRA contributions, so you can keep contributing to a traditional IRA, too. That means you have the chance to continue increasing your retirement account balance if you work part time as you transition into retirement.
Those over 50 are actually entitled to make larger tax-deductible contributions than their younger peers thanks to catch-up contributions, so these later years are a great time to really boost your account balance and ensure you'll have plenty of money to live on late in life.
If you're leaving a full-time job that provides retirement benefits, you'll usually be able to keep your 401(k) funds with that employer so you don't have to change anything if you don't want to. But you also have the opportunity to roll over your 401(k) into a traditional IRA without incurring tax penalties. If you want to consolidate your accounts or get access to more investment options than your current 401(k) provides, moving your money can make sense.
If you leave your full-time job before you turn 65 and gain access to Medicare, you have to figure out how to maintain health insurance coverage. This can be tricky if you take a part-time job and your new employer doesn't provide insurance.
One option is to keep your coverage with your current employer under COBRA. You can maintain your insurance for 18 months, or up to 36 months under certain circumstances (such as if you're disabled). If you are scheduled to become eligible for Medicare within less than 18 months, coverage for your dependents could also extend for up to 36 months after the date of your Medicare eligibility. Unfortunately, employers generally stop subsidizing premiums when you leave your job, so choosing COBRA could be expensive.
If you don't have employer-provided coverage while doing part-time work, you could potentially also qualify for a subsidized plan sold on the Obamacare exchange. Eligibility for subsidies depends on income and household size, but coverage could be much cheaper than COBRA. Regardless of whether you qualify for subsidies or not, leaving your full-time job and losing employer-provided coverage is a qualifying life event, so you won't have to wait for open enrollment to buy a policy.
If your spouse has a workplace plan and will remain employed, you could also potentially get covered as a dependent on your spouse's plan.
There's nothing wrong with taking a nontraditional path to retirement. In fact, transitioning to part-time work instead of leaving the workforce altogether could allow you to make your savings account larger and ensure your savings last longer. You just need to understand the impact of this choice on your Social Security benefits and make sure you're making smart decisions about how you handle your retirement savings and healthcare needs toward the end of your working life.
By following these tips, the path to retirement should be smooth, even if you don't go right from your full-time job to a life of leisure.