“I can’t afford to retire.” How many times have we heard that line? Too often to count, and generally for the same (good) reason. But in our business, you can expect the unusual, and we recently heard a classic.
Our client (we’ll call her Mary) is single, over 70-1/2, and as such, would normally have to take RMDs (Required Minimum Distributions), both from her Traditional IRA and her TSP (Thrift Savings Plan, the government employees’ form of a 401(k) Plan). Working after age 70-1/2 allows her to make ongoing, tax-deductible, contributions to her TSP account.
More importantly though, working postpones her RBD, or Required Beginning Date. In other words, her RMD requirement is delayed until the year after she retires. Her net result of continuing to work is a (positive) triple whammy; current income is reduced by the salary deferrals (her contributions), current income is then further decreased by the lack of a required RMD from her TSP (poetic, isn’t it?), and third, her TSP balance increases with new contributions.
Tax calculations for Mary are complex, but her taxes are not significantly different whether working or not, due to the various offsetting effects of her income and deductions.
What is the bottom line on Mary’s working? Overall income is not changed a lot, but if she retires, her TSP balance would start declining (RMDs), rather than growing as it is now. The government also matches some contributions, which is simply “found money” for her. At this point, since she enjoys her work, she is improving her net worth by staying in the Accumulation Phase of her financial life (growing wealth), rather than entering the Distribution Phase (declining assets). If she lives to 100 or beyond (a real possibility these days), she will be financially sound. How many of us can say that?
Granted, Mary’s situation is somewhat unique, but there are lessons here as well. Mary’s current financial condition is the result of a lifetime of saving and investing. She is a role model for great financial behavior. The first takeaway from my story is exactly that; do as Mary did. The second is to establish a relationship early with competent fee-only financial advisors. Third, you may think (as we often do) that you have heard everything. Then along comes Mary (apologies to The Association, for those old enough to understand the reference).
Van Wie Financial is fee-only. For a reason.