The question of when to retire has never taken on greater significance

A proposal by the French government last fall to raise the legal retirement age there from 60 to 62 sparked riots, the burning of cars and smashed storefronts. The age was raised nonetheless because France needed to make its economy more competitive.

In the United States, weighty retirement decisions are more likely to evoke anxiety rather than anger. Baby boomers are well aware that they can take reduced Social Security benefits at 62, full benefits at 66 and their largest maximum benefits at 70.

But there are complications:

Americans are living longer, spending just as much in retirement as they did while working and are still digging themselves out of one of the nation's worst financial debacles in history.

"Retirement thinking has changed because the world has changed and people are regularly living into their 80s," explained Marilyn Capelli Dimitroff, certified financial planner and president of Capelli Financial Services Inc. in Bloomfield Hills, Mich. "In addition, the old rules of thumb -- that you will spend just two-thirds in retirement of what you did when working -- are ridiculous."

Therefore, the choices include staying on the job longer than planned, taking Social Security benefits while still working, holding a part-time job while receiving benefits or retiring completely but postponing benefits. There are personal decisions, too.

"I often ask my clients of retirement age, 'So what is our next adventure?'" said Evelyn Zohlen, CFP and president of Inspired Financial, Huntington Beach, Calif. "Some clients feel that leaving work would shut down their identity, others want to pursue a new passion or second career, and some want to spend time with family and travel."

Many people stay on the job for financial reasons, such as children in school, mortgage payments or inadequate investments, while others simply feel they still have something worthwhile left to give. The "tough love" advice of many financial planners is to hang in there on the job until you qualify for full Social Security benefits.

"Since you can retire at age 66 with full Social Security benefits, it is really between ages 62 and 66 that you must consider the tax implications," said Capelli Dimitroff. "I encourage everybody to postpone taking Social Security -- as long as you are healthy -- until full retirement age because it is about an 8 percent benefit that will continue over your lifetime."

For baby boomers still working beyond 66, it also makes sense to postpone your benefits until age 70 because it will result in a significant increase that gets compounded over your lifetime, she added.

"If you don't need the money, you're going to have to pay taxes on it, and there's no need to do that," said Zohlen. "Even if you have retired and are working part time, you do not want to take your Social Security benefits until age 66 unless you really need them."

In addition, one spouse may be entitled to a higher Social Security benefit than the other, she noted. If the spouse with the higher benefit can hold off as long as possible, the survivor will be guaranteed a larger benefit.

"Of course, anyone who is really tight for cash will need to take them now even though the benefit would be higher later," said Mark Balasa, CFP and co-CEO of Balasa Dinverno Foltz LLC in Itasca, Ill. "We advise our clients who don't need the money to take their Social Security benefits later on because the benefit goes up."

Another possibility is working while receiving Social Security benefits at the same time.

Keep in mind that if you take benefits before full retirement age, your annual earnings over $14,160 will reduce your annual benefit amount. However, any money paid to Social Security could mean a larger benefit when you reach full retirement age, at which point the SSA recalculates your benefits.

Consider taxation.

Your Social Security income may be taxable if you have substantial income from wages, self-employment, interest, dividends and other taxable income. However, no one pays federal income tax on more than 85 percent of their Social Security benefits.

Keep your total income in mind.

Many retirees no longer have mortgage interest deductions. They must also withdraw their traditional individual retirement account distributions after reaching age 70 1/2. Deciding when to withdraw retirement account money to your best tax advantage requires careful planning.

"I am clearly seeing more retirement anxiety from clients in regard to how long their money will last or whether they should go back to work -- even if we can show them projections that they don't need to work," said Balasa. "But unless people really have something they want to do part time or feel that they must have a job, I don't think many of them are really all that excited about the prospect of going back to work."

It's a time to handle money carefully.

One of Balasa's retired clients was actively looking for work but gifting a considerable amount of money to his children. Balasa told him to pull back on that generosity.

"Focus on what you can control, such as your spending rate, expenses and the tax efficiency of your investments," Balasa concluded. "Don't be paralyzed by worrying about what Fed Chairman Ben Bernanke might do next."

 

 

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