By Dave Rowan
Learn more about Dave on NerdWallet’s Ask an Advisor
Many Americans are working longer, gently nudging the average retirement age upward. After falling from 1900 to 1990, the average retirement age increased from 63 to 64 in the most recently completed decade (2010), according to a recent report from Merrill Lynch. Part of this trend is the large number of Americans who are choosing to work in retirement, either in their current fields or by pursuing an encore career that is perhaps more fulfilling, meaningful or enjoyable.
But whatever career goals or ambitions you may have, there are important financial issues to consider as you near retirement — or your encore career.
4 types of workers
The Merrill Lynch report shows that more than 70% of pre-retirees say they want to work in retirement, but it also looks at why workers pursue encore careers. It found that those who work in retirement tend to fall into one of four groups: driven achievers, caring contributors, life balancers and earnest earners. According to the study:
- Driven achievers are still at the top of their career game and are choosing to work not because they need the money, but because they still love the work. This group makes up 15% of encore career seekers, and about 40% of them are either self-employed or own their own businesses.
- Caring contributors are not working for the money, but instead volunteer or work for nonprofits to give back to society. They make up 33% of the population working in retirement.
- Life balancers are seeking more career satisfaction while earning a few extra dollars to shore up their retirement finances. They report high levels of enjoyment in their encore career by finding work that is fun and less stressful. Twenty-four percent of working retirees fall into this category.
- Earnest earners are among the least financially prepared for retirement and have determined that they must work to pay the bills and save for when they finally do get to fully retire. The final 28% of those working in retirement are in this group.
Top financial considerations
As members of each group have different motivations for working longer, they may need to have different financial priorities as they make their way toward full retirement. But no matter which group you are in, there are certain financial issues that everyone nearing retirement age should be thinking about.
When you leave a job and enter retirement, even if you continue working, you should consider rolling over any old 401(k) plans from your previous employers into your IRA. You’ll have more control over your investment choices and often be able to better diversify your portfolio with lower fees — old, high-fee plans can hurt the returns you need to maximize your retirement savings.
As you get older, it’s also important that you get your estate plan in order. Have in place the right estate-planning documents like beneficiary designations, a will, medical powers of attorney and trusts (if you need them). Find out what other actions you may need to take to help your estate avoid probate (the often lengthy legal process of distributing a deceased person’s property). Even if you won’t be leaving a significant estate behind, you should consider ways to maximize the transfer of your assets to your heirs in accordance with your wishes.
Another consideration for those near retirement is deciding when to collect Social Security benefits. While not true for everyone, in most cases it makes sense to defer collecting for as long as possible for two reasons.
The first is because your benefits increase by about 8% for each year that you wait after full retirement age (today it’s 66 or 67 depending on the year you were born) through age 70. This works the other way as well. If you start before full retirement age (as early as 62), your benefits will be reduced. Unless you are in poor health, you’ll likely collect far more in lifetime benefits by waiting until 70 than by collecting as soon as you’re eligible.
In addition, if you do decide to collect prior to your full retirement age and you’re still working, your benefit will be further reduced. For every $2 you earn above $15,720 annually in 2016, your Social Security benefit will be reduced by $1. Here’s a simple example of this. Let’s say you’re 64 and working in an encore career that pays $25,720 a year. This is $10,000 more than the annual limit of $15,720. As a result, your Social Security benefit will be cut by $5,000 a year until you reach full retirement age.
Priorities for encore careerists
Beyond these important elements of your financial picture, there are also specific issues for workers to focus on depending on why you are pursuing your encore career.
If you are a driven achiever, you should be most focused on working with your financial advisor to develop a detailed retirement plan that ensures your long-term finances are tracking to meet all of your professional and personal goals. If you’re an entrepreneur, you should look to maximize the value of your business. This includes establishing a retirement plan such as a SIMPLE IRA or SEP IRA for you and your employees as well as business succession planning if you’ve been in business for a while.
If you are either a caring contributor or life balancer, it’s best to focus on working with your financial advisor to make sure your encore career is providing you with enough income to keep your long-term finances on track. Also take advantage of catch-up contributions to your IRA to further shore up your retirement finances.
And finally, if you’re in the earnest earners group, your top priorities should be eliminating all debt and establishing (or building up) an emergency fund to cover the financial curveballs that life may throw your way. If your employer offers matching contributions to your 401(k), take full advantage. Focus on making catch-up contributions to your own IRA if your employer doesn’t offer a retirement plan.
If you’re considering an encore career, think about why you want to keep working. Is it because you love your current work, have always wanted to start your own business, want more fun and flexibility in your career or genuinely need the income? Then you can prioritize your financial efforts according to your situation. Whatever your reason for working longer, you must ensure that your encore career keeps you on track to meet all of your personal and professional goals as you make your way to what hopefully is a full and happy retirement.
This article was written by NerdWallet and was originally published by Forbes.