How to navigate benefits if you’re working past age 65

It’s no secret that Americans are working longer. But some are working well past traditional retirement age: the fastest-growing segment of the labor force is workers over age 65, according to the U.S. Bureau of Labor Statistics – and the growth is especially pronounced among workers over age 70.

Working longer certainly can boost the odds of a successful retirement plan via higher Social Security income, retirement account contributions and fewer total years of dependence on portfolio accumulations.

But working well past traditional retirement age does present some complications. Much of our retirement benefits structure still is geared toward a more traditional retirement age. The Medicare enrollment age is 65; Social Security’s full retirement age (FRA) is 66, on its way to 67 in 2027. Required Minimum Distributions (RMDs) must begin at age 70 ½. And the tax-deferred retirement system is predicated on the idea that older people will be in lower tax brackets when funds are withdrawn than during the traditional wealth accumulation years.

Here are some key retirement planning items to keep in mind.

Social Security

Working longer is a great way to get the most out of Social Security. Benefits are calculated using a formula called the primary insurance amount, or PIA. Seniors who wait to start receiving Social Security until their full retirement age (currently 66) receive 100 percent of PIA; taking benefits at 62, the first year of eligibility, gets them only 75 percent of PIA. By waiting until age 70, they’ll receive 132 percent of the PIA – nearly double the monthly income for the rest of their lives. Those benefits are enhanced by an annual cost-of-living adjustment, which is added in for years of delayed filing.

For people working in their 60s, there’s very little sense in filing early – unless you have reason to think your life expectancy will be unusually short. Earlier filers who have income from work in 2013 of more than $15,120are hit with a penalty (Social Security defines “income” in this context as wages from employment or net earnings from self-employment). If earnings exceed the limit, $1 will be deducted from benefit payments for every $2 earned over that amount. The withheld benefits are added back into benefits after you reach full retirement age. After that age, they can have unlimited income and receive Social Security benefits without penalty. For 2014, the earnings test limit is $15,480; in 2015 it will be $15,720.

Likewise, there’s no reason to wait beyond age 70, even for people who are still working, since credits stop accruing at that age. However, it’s important to keep an eye on taxation of Social Security. Benefits are taxed using a “combined income” formula that is determined by adding together adjusted gross income, tax-exempt income and half of the Social Security benefit. If that total exceeds $25,000 for individuals ($32,000 for married couples), then 50 percent if the excess must be included in income for tax purposes; if it’s over $34,000 ($44,000 for couples) then 85 percent of the excess is included in your income. 

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