What to Do With Your Retirement Plan If You Aren't Retiring

Even if you've decided not to retire, your retirement plan can still come in handy.

In a recent survey, UBS Wealth Management discovered that nearly half of wealthy pre-retirees (45%) have a retirement savings target between $1 million and $3 million. Roughly 91% believe they have the financial tools and knowledge necessary for a comfortable retirement, with 89% saying they are confident they will have enough money saved. In addition, 74% believe they know how long their savings will last once they retire.

However, there are some folks out there who may not wish to retire at all. When asked what they'd miss most, 64% of wealthy workers (those with more than $1 million in investable assets) said they'd miss the comforting stability of the work schedule more than their salary. Others fear the adjustment to retired life (59%), leaving work colleagues behind (57%), experiencing an initial shock (39%) losing a sense of purpose (36%) and filling the hours of free time (34%). For those engrossed in their work and excelling at their jobs, retirement can seem more like a looming inevitability rather than a welcome respite.

"Baby Boomers have been known for 'living to work,' having been focused on their careers for so many years," says Paula Polito, client strategy officer of UBS Wealth Management Americas. "Now, as many of them look toward retirement, they need to start 'working on living' - figuring out how they will fill their time and find their purpose once they leave the workforce."

For many American workers, retirement will still involved work of some kind. As the folks at Bankrate.com discovered in a recent survey, 70% of non-retired Americans plan to work as long as possible during retirement. Only 25% say they have no plans to work during retirement. Of those who plan to work as long as possible during retirement, 38% are planning to work because they like to work, 35% need the money and 27% say it's a mix of both.

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Two years ago, Franklin Templeton discovered that 61% of workers would delay retirement if they didn't amass sufficient income. Nearly three-quarters (74%) of the youngest among the (aged 18 to 24 years) said they would just keep working to make more money, with 30% saying they'd never retire. While 28% say they expect work to be a primary source of income in retirement, 20% say they'll keep working because they enjoy it.

"Working during retirement brings a lot of benefits," says Jill Cornfield, Bankrate.com retirement analyst. "I'm not surprised that nearly three-quarters of people said they'd like to work as long as they can while in retirement. It's not just the money. When you can work as a consultant or find some part-time gig, it really helps you stay sharp."

But what about all of those retirement plans you've made and all of that savings you've tucked away? Dan Yu, managing principal of EisnerAmper Wealth Advisors notes that you can defer payout on a 401(k) and similar plans indefinitely. It's your conventional IRA that is a bit trickier, as it's going to require you to take a minimum distribution at age 70.5 whether you like it or not.

If you're still running your company or sitting on a board when that required minimum distribution is about to come due, it may be worth your while to convert to a Roth IRA instead. According to Judith Ward, certified financial planner at T. Rowe Price, conversion could have huge repercussions for hypothetical married investor with an annual household income of $190,000 in the 28% tax bracket. If that 54-year-old investor has $500,000 saved for retirement in a traditional IRA and $130,000 in a taxable account. If she continues to contribute $6,500 annually to the traditional IRA until age 65, things could get problematic.

If she keeps her money in a traditional IRA, she would have to take nearly $2.36 million in RMDs. However, even if the RMDs from the traditional IRA were reinvested in the taxable account, and the taxable account grew at a tax-adjusted rate of 4.32% per year as the IRA grew 6% annually, she would have to pay $659,600 in taxes on those RMDs. However, if she began converting some of her money in the IRA to a Roth IRA at age 55, she's only have to take $622,000 in RMDs and pay $342,200 in taxes on it. If she lives to age 95, the $4,416,400 her accounts would have been worth in a traditional IRA will be worth $5,321,500 after being converted to a Roth IRA.

"It's best to do it when the market is at a very low point, but the market's at a record high today," says Eric Meerman, certified financial planner and vice president at Palisades Hudson Financial Group in Stamford, Conn. "We don't like to market-time, but this is the worst time to have ever done it in history. But who knows what will happen in the future?"

When converting to a Roth IRA, investors have to pay taxes on money being withdrawn from the traditional IRA up front -- likely from the income received as they continue working. However, any growth in the Roth IRA would come tax-free. Investors can make withdrawals at their own pace without any tax liability, avoid a bump in taxable income from required distributions and, according to Dan Yu, managing principal at EisnerAmper Wealth Advisors, lay a foundation for future generations of wealth.

"If they did some estate planning, they could give it to a generation or even grandkids down the road and give it even more room to grow on a tax-exempt basis," Yu says. "This is a further gifting to your heirs: you've paid their income tax liability. It's kind of slick."

So why not just start with a Roth IRA? Unfortunately, high-income investors are typically shut out of them. In order to contribute the maximum to a Roth IRA in 2017, you must have an adjusted gross income of less than $117,000 for single filers and less than $184,000 or less for married couples, filing jointly (less than $132,000 and less than $194,000 or less, respectively, for partial contributions). However, you can convert assets from a traditional IRA to a Roth IRA at any income level.

Meanwhile, if you've just hit retirement age and opted to continue working, there are still ways to shelter big portions of your income from tax liability for a few years.

"I have a couple of clients who have 'retired' from corporate life but, in their mid- and late-60s, they've sat on various company boards," Yu says. "One of the things I recently debated with them is that the board fees they get can go into a SEP-IRA account, where you can put upwards of $54,000 or 25% of self-employment income away."

However, even if you aren't retiring, it helps to have some access to extra money just in case of emergency. Meermann notes that workers in high-deductible health care plans can put their money into health savings accounts (HSAs), where it can grow tax-free as long as you use it for qualified health expenditures (doctors and medications, but not premiums). The Internal Revenue Service sets the HSA contribution limit at $3,400 for individuals, but bumps that up to $4,400 for contributors 55 and older.

EisnerAmper's Yu, meanwhile, recommends keeping 18 to 24 months worth of savings on hand to cover yourself in the event of an emergency. With health care costs growing at a rate two to three times that of inflation and health care accounting for a third of expenses by the time a person hits 70, Yu recommends not only that cushion of savings in a low-yield account, but a more aggressive health-care savings plan for those who decide to stay on the job.

"I want to keep up with that exacerbated inflation rate, so where can I get 6% or 7%?" Yu says. "Not in fixed income, not in CDs, but in equities. But if it's something we're going to tap into, we have to be really prudent about having equity exposure when we have short time horizons."

As much as staying employed beyond retirement age can be an empowering and fulfilling decision, those health-care measures that Meermann and Yu describe are a reminder that retirement isn't always by choice. According to a survey by Prudential Investments, 51%retirees retired earlier than planned. Of those who retired earlier, 50% retired five or more years earlier than expected. Only 2% retired early because they either wanted to retire or were tired of working. Unfortunately, 52% retired early for health problems or to take care of a loved one, while 30% were laid off or bought out.

"I think people tend to overestimate their health and how long they're going to actually work," Meermann says. "There's a big disconnect between where people think they're going to hang it up and when they actually do, so that's a few more years of you drawing down on the portfolio to fund your living expenses. Those early year withdrawals can make a big difference in how long it's going to last."