8 Financial Tips for Seniors Who Work

Whether you want to work or need the money, here are ways to keep more of what you earn.

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The percentage of persons past the age of 65 who are still employed has risen because of the Great Recession. Even without a downturn, however, there has been a longer term trend of more people wanting to keep working. There is the money, to be sure. But many people stay on the job to retain professional relationships and a degree of social engagement they think will be hard to match in retirement. Much of our personal identity is related to our work; it can be tough to give up a big hunk of self worth along with the paycheck.

[ See America's Best Affordable Places to Retire.] Laura J. Abbott DeCarolis is a certified financial planner with Horizon Financial Planners in Monroeville, Pa., which is near Pittsburgh. She says her clients are "normal" people and not super wealthy. Growing numbers of them have decided they need to continue working or go back to work, she says. Often, however, when she reviews their financial plan, it turns out that they don't need to return to work for financial reasons. Their financial plan is still sound, she says. What's not so solid is their confidence in the future; plus, they might not have been that excited about retirement in the first place. For these people, economic hard times are the excuse they were looking for that justifies what they already wanted to do -- go back to work.

"There are so many non-monetary factors that go into this equation," agrees Peter A. Carnathan, a planner with Fiduciary Trust Co. in Washington. He has an affluent client base, including lawyers and other professionals who still wield substantial clout and are at their earnings peaks in their 60s. Often, he notes, they are forced to cut back because of mandatory employer retirement rules. This can trigger reduced hours and flexible "of counsel" relationships. It also may drive them to seek jobs at firms without mandatory retirement rules.

Whatever the reason for continuing to draw a paycheck at age 65, here are eight recommended actions that older employees should consider:

1) Watch Your Tax Bracket. The Bush tax cuts expire next year. Even if the Republicans regained control of the House and Senate, keeping the cuts would not be a slam dunk. There is just so much red ink everywhere. So, assume that marginal income tax rates will be rising. Check out the current IRS tax brackets and see where the income breaks are for tax-rate changes. Look at your taxable retirement income from Social Security, pensions and retirement accounts. Understand the impact of employment earnings on your tax bracket. Higher taxes may not drive your employment decisions. But it could make good sense to explore tax-deferred retirement accounts so you can avoid higher taxes and park your earnings until you can withdraw them when your taxable income has declined and you are paying lower rates.

2) Beware of Losing Social Security Dollars. Social Security rules calculate a full retirement age, which is 65 or 66 for most people. If you elect to begin receiving Social Security benefits before your full retirement age (you can start getting benefits when you turn 62), your benefits may be reduced if you also earn outside income.

[See Reinventing Retirement Becoming Boomer Model.]

3) Review Social Security Claiming Decision. If employment earnings reduce your need for Social Security benefits, deferring the date when you begin claiming those benefits may be a smart decision. You are entitled to 100 percent of your benefit when you reach full retirement age. However, for each year you delay, your benefit will rise by 8 percent a year. That's a nice increase, and it's adjusted for inflation as well. The longest you can delay and still get higher benefits is age 70, at which point your benefit will be 132 percent of what it was when you turned 66 (assuming this is your full retirement age). Outside income may also influence the way couples approach Social Security benefits. The Center for Retirement Research at Boston College has a useful Social Security Claiming Guide. 4) Seek Higher Investment Returns. Financial planners Carnathan and DeCarolis both say it may be appropriate for employees of retirement age to build a more growth-oriented investment portfolio if they are continuing to work and earn employment income. They are not subject to as much risk of a stock-market decline as a fixed-income retiree who has no other source of income and doesn't have time to wait for depressed market holdings to recover. However, they stress that asset allocation decisions must reflect a person's risk tolerance. Even "doing the right thing" won't seem that way if it runs counter to your feelings. "You can't make someone do something they don't want to do," DeCarolis says.

5) Keep Employer Healthcare Coverage. "Health care is the big reason my clients don't retire before 65," DeCarolis says. No wonder. Private health insurance for people in their late 50s and early 60s is very expensive, assuming you can find coverage at all. The health reform law will help here but its provisions don't take full effect until 2014. In the meantime, keeping employer health insurance is an important consideration in the work or retire equation. Turning 65 and qualifying for Medicare hardly resolves this issue. Basic Medicare has big coverage gaps. So, if you can retain some form of health insurance along with a paycheck, consider yourself fortunate.

6) Play Catch Up With Retirement Accounts. Tax rules generally allow older employees to park an extra $1,000 in tax-deferred retirement accounts. This is on top of existing annual maximum contributions. Assuming you don't need the current income, plow as much as you can in these tax-deferred accounts. You'll be storing money you will need in retirement, and lowering current taxable income as well.

7) Keep Good Expense Records. Understanding exactly what you spend is great training for retirement and should be part of your retirement planning. Having such a record will make it easy for you to estimate your post-retirement spending needs and whether you will have enough retirement income to live comfortably. In addition, you might be able to deduct certain employment expenses on your taxes. With more and more people telecommuting, home office expenses can be considerable. Also, if you volunteer, there are deductible expenses that can reduce taxable income.

8) Watch Your Cash Flow. Carnathan says a solid cash flow analysis is a fundamental part of a client's retirement thinking. He recommends doing scenarios with different time frames, looking out a year, three years, and five years. This helps clients better understand the merits of continuing to work. Equally important, it moves them into a life transition process. This process is really a more accurate description of retirement than a specific trigger date. "People tend to gravitate toward a specific scenario," he says. "From there, we go on to figure out the best mix of assets" that will support their longer-term income needs.

[See 8 Realities of the New Retirement.]