Retirement Planning in Philadelphia

What retirement planning looks like in Philadelphia

A retirement plan answers a few practical questions. How much will you spend each month? Where will the money come from? What happens if one spouse dies early, or if care is needed? For Philadelphians those answers depend on employer pensions, hospital and university plans, Social Security, the value of the family home and the property tax that comes with it.

According to the U.S. Census Bureau, 2020 to 2024 American Community Survey, 14.7% of Philadelphia residents are 65 or older and the median age is 35.3. Pennsylvania as a whole is older, with 19.5% of residents 65 or older. The city is younger than the state, yet many of its neighborhoods, including Northeast Philadelphia, Mayfair, Overbrook and Roxborough, have long-settled households that are already in or near retirement.

Start with the monthly number

Rather than guessing a target nest egg, begin with spending. List what you pay now for housing, utilities, food, transit, insurance, medical costs and gifts, then remove what ends at retirement, such as commuting and payroll taxes, and add what begins, such as higher health costs and travel. A couple in their late fifties who own a paid-off rowhome in Mayfair might find that 4,500 dollars a month covers their life, while a pair of retired professors in a Society Hill condo with a mortgage might need twice that.

Once the monthly number is clear, subtract dependable income. What remains is the amount your savings must supply, and that gap sets the savings goal.

Pennsylvania taxes at retirement

This is the state’s strongest feature for retirees. Social Security is not taxed by Pennsylvania, and distributions from eligible pensions, 401(k) plans, 403(b) plans and IRAs are generally not taxed once you meet the plan’s retirement conditions. Federal tax still applies. Interest, dividends and capital gains from taxable accounts remain subject to state tax, so the account you draw from matters.

Two cautions apply. A retirement distribution taken before you meet your plan’s conditions may be treated as taxable, and the rules differ by plan, so check with the Pennsylvania Department of Revenue or a tax professional before leaving a job. Also remember that Philadelphia’s Wage Tax is aimed at earnings, so it stops once your paycheck does, though investment income of residents can still face the city’s School Income Tax. Confirm the current rules with the city Department of Revenue.

Pensions from the city, the schools and the state

A large share of Philadelphia workers belong to a public pension. School District employees are generally in the Public School Employees’ Retirement System, state employees in the State Employees’ Retirement System, and city workers in the Philadelphia pension system, with other plans for transit and some authorities. The decisions you make at retirement usually cannot be changed.

The main choices include how much to take as a lump sum if the plan allows it, which survivor option to choose and when to start. Picking a higher monthly check with no survivor benefit can leave a surviving spouse with nothing, while a survivor option lowers the check but protects the household. A planner can run both paths and compare them with the life insurance you already have. City employees who are eligible for a deferred retirement option should also ask how it affects the timing of pay and taxes.

Hospital and university plans

Penn, Temple, Drexel, Jefferson and the health systems around them offer 403(b) or similar plans with a menu of investments and sometimes a pension or employer contribution. These plans often have many small accounts from past jobs. When you retire, consider combining old accounts, checking the fees in each one and deciding which you will draw from first. Faculty and physicians who held several jobs may find five or six accounts with overlapping funds.

Social Security timing

You can claim from 62 until 70. Claiming early lowers the monthly benefit for life, while waiting raises it. For a married couple, the higher earner’s decision matters most, because that benefit becomes the survivor benefit. Someone who spent years in a public job that did not pay into Social Security may face reductions, which a planner should check before assuming a number. Use your own statement from the Social Security Administration rather than an online average.

A retired couple, say a 64-year-old nurse and a 66-year-old bus driver, might claim at different ages so that one benefit starts early for cash flow while the larger one grows. The right answer depends on health, savings and other income.

Medicare and the gap years

Medicare eligibility begins at 65. If you retire at 62 or 63, you need coverage for the gap, which can come from COBRA, a spouse’s employer plan or a marketplace plan. Missing the Medicare enrollment window can bring lifelong penalties, so mark the dates early. Philadelphia has several large health systems, and the choice between Medigap and Medicare Advantage may depend on which hospitals and doctors you want to keep. Check the provider network before choosing a plan each year.

Pennsylvania’s PACE and PACENET programs help eligible seniors with prescription costs, with income limits. Confirm current rules with the state.

Aging in place or moving

Many Philadelphia homes have three floors, steep stairs and narrow doorways. Staying put can be inexpensive, but retrofits such as a first-floor bathroom, a stair lift or a roof repair cost real money. Selling to downsize means closing costs, transfer taxes on the buyer and seller sides, and a market that varies by neighborhood.

Options people consider include a condo in Center City or University City, a one-floor home in Bucks or Montgomery County, a continuing care community in the suburbs, or a move closer to family out of state. Pennsylvania does not tax most retirement income, so moving only to escape state income tax seldom saves much, though property tax, sales tax and warmer weather may still matter. A planner can compare the total yearly cost of each choice.

Property tax and relief for older owners

Assessed values in the city have risen in recent years, and owners on fixed incomes feel it. Philadelphia and the state offer the Homestead Exemption, a tax freeze for eligible older owners, installment plans for people behind on payments, and a rebate program for older adults and others who qualify. Each has income and application rules, and some require annual renewal. Ask a housing counselor or the Department of Revenue which ones fit you.

Transit and the cost of a car

Seniors in Pennsylvania can ride most fixed-route transit for free, which includes SEPTA buses, subways and trolleys. For a retiree in Center City or Northeast Philadelphia, giving up a second car can free several thousand dollars a year. Count that saving, along with insurance and parking, when you think about the cost of retirement.

Turning savings into paychecks

Most retirees use a mix of sources. A rough sequence looks like this.

1. List fixed income: Social Security, pensions and any annuity.
2. Set aside a cash reserve for one to two years of withdrawals.
3. Decide which accounts to draw from: taxable first, pre-tax next, Roth last, or a blend that keeps the federal tax bracket steady.
4. Plan required minimum distributions, which start at a set age, and consider Roth conversions in lower-income years.
5. Review spending and withdrawals every year.

Because Pennsylvania does not tax qualifying retirement distributions, Roth conversions mostly raise the federal bill and Medicare premium brackets. A planner can estimate the effect before you act.

Long-term care and family

Long-term care costs are a risk for many families. Options include saving to self-pay, a hybrid life insurance policy with a care rider, a long-term care policy or relying on family. Rates rise with age, so the time to look is typically in the fifties or early sixties. Pennsylvania’s Medicaid rules for nursing care include a look-back period for gifts, so giving away a home to children to qualify can backfire. Consult an elder law attorney.

What retirement advice costs

A retirement plan from a fee-only planner is commonly a flat fee, often in the low thousands. Advisors who also manage your savings commonly charge a percentage of assets each year, often near 1 percent. Annuity and insurance sellers earn commissions. None of these is wrong, but you should know which one you are dealing with and ask for the full yearly cost in writing.

Choosing a retirement advisor

• Ask whether the advisor is a fiduciary for every part of the work.
• Look for a Certified Financial Planner or a Retirement Income Certified Professional, then verify on the issuing site.
• Check the firm on FINRA BrokerCheck and the SEC adviser search.
• Ask how many clients with public pensions or hospital plans the advisor serves.
• Request a sample plan so you can judge the clarity.

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Leaving money to children

Pennsylvania does not have an estate tax, but heirs other than a spouse may owe inheritance tax. Children and grandchildren owe a low rate and siblings more. Retirement accounts pass by beneficiary form, so review those forms after any marriage, divorce or death. Most children who inherit an IRA must empty it within ten years, so a thoughtful plan avoids loading a high earner with a large taxable account. For background, see our investing guide, life insurance guide and budgeting and saving guide.

Working longer or phasing out

Not everyone stops on a single day. A hospital technician, a school administrator or a self-employed contractor in Port Richmond may cut back to three days a week at 63, then stop at 67. Part-time work lowers the amount you must draw from savings in the early years, lets Social Security grow if you delay it, and keeps employer health coverage in place until Medicare starts. The planning questions are how much the reduced pay covers, which month the pension begins, and whether delaying withdrawals leaves room for Roth conversions at a low tax rate.

Earnings after you claim Social Security before full retirement age can temporarily reduce benefits, so check the limit with the Social Security Administration before taking a job. Work income still triggers the city Wage Tax, so include it in your budget. A written plan with a few scenarios, such as retiring at 62, 65 or 68, shows what each year of work adds to monthly income. For a closer look at how a portfolio supports withdrawals, see our investing guide, and for coverage that protects a spouse, see the life insurance guide.

Frequently asked questions