Many people plan to work to some degree during retirement. Perhaps because they want or need the income to cover expenses or maybe they just want to keep active and social. Many view retirement as an opportunity to explore new areas of interest or fulfill a burning sense of purpose. No matter the reason(s), a decision to work during your golden years will impact you in various ways. Taking the time to explore the costs, hazards, benefits and overall effect it will have on your life is crucial before making this determination.
You have options when it comes to Social Security. Every year you work your earnings history is improved, which can increase the amount of Social Security you receive since Social Security determines your benefit based on your 35 highest-earning years. If the amount you earn exceeds an amount you paid previously, your benefits could increase as a result. Part-time earnings may allow you to delay taking Social Security benefits, which will increase your checks by 7% to 8% each year past your full retirement age (up to age 70). If you decide to receive Social Security after reaching full retirement age, you will receive full benefits regardless of your earnings. It is also important to note that if you started receiving Social Security early and go back to work within a year, you can cease benefits, pay back the amount of benefits that was paid out during the year, and have the opportunity to receive full benefits in the future. If you suspend your benefit, that also suspends the benefit your spouse may be receiving based on your work record.
Extra Income/Retirement Savings
Working during retirement can provide an income supplement for traveling, gifts, activities, family time or to help cover typical expenses. It affords you the ability to delay spending down your retirement accounts, giving them more time to grow. There are many people who have struggled to accumulate the amount needed to live their desired lifestyle in retirement. For these individuals, working provides them with the financial cushion they need to either reach that goal or at least get closer to it.
Employer Benefits/Health Insurance
As an employee, even part-time, you may have access to employer benefits including health insurance and an employer-sponsored 401(k) plan, which may come with the potential for an employer match. If you are lucky enough to participate in the company plan, any money inside the employer’s plan is exempt from required minimum distributions (RMDs) at age 70 ½ and later, if you stay actively employed. If you still have money being held in an inactive 401(k) from a former employer, these funds would typically be subject to required minimum distributions, but you can escape this if you are allowed to roll your inactive account over to your current employer’s plan. Companies with 20 or more employees are required to offer the same health insurance coverage to those age 65 and older as it does to younger employees. However, typically a certain number of hours must be maintained to keep the health insurance, so check with your employer.
The Good Stuff
Working part-time in retirement can help you stay mentally sharp, provide social stimulation and may even keep you physically fit. Perhaps you have been searching for a job that allows you to “give back,” and provides a feeling of fulfillment. Maybe you have a specific passion you’ve always wanted to nurture but never had the time or been in the position to do so. For some, having a place to go where you can build camaraderie with others while also satisfying a need for achievement, is important. Oftentimes, work in retirement is more flexible than pre-retirement career jobs. Part-time work, bridge jobs, consulting and phased retirements are all options being utilized by retirees.
Unfortunately, working in retirement also has some drawbacks to consider:
While there are benefits, as we mentioned above, there are also some drawbacks and important considerations to glean in the decision-making process. If you are collecting Social Security but have not reached normal retirement age, (currently 66 but rising to 67) going back to work will come at a cost. For every $2 you earn over the annual limit ($17,640 in 2019), you will lose $1 of benefits.
There are many tax considerations for a retiree. Social Security taxes are based on your “combined income.” This means your adjusted gross income (wages, dividends, capital gains, retirement distributions), plus tax-exempt bond interest, and half of your annual Social Security benefits. For individuals, if your combined income is between $25,000 and $34,000, you may have to pay income tax on up to 50% of your benefits. If you have more than $34,000 in combined income, you may have to pay income tax on up to 85% of your benefits.
You may lose out on tax planning techniques like capital gains harvesting and Roth conversions as a result of being pushed into a higher tax bracket from the additional income. One of the benefits of taking distributions from a 401(k) or IRA in retirement is that you are most likely in a lower income-tax bracket, which means you are paying less tax. Make more money and you won’t be reaping these benefits. If your part-time income puts you at or beyond the 25% income tax bracket, you may be subject to a 15% or 20% capital gains tax rate. However, recent tax reform has made possible lower taxes for many retirees through the new tax deduction and rate rules.
A business with fewer than 20 employees can opt to exclude employees age 65 and older from the group health insurance plan. Even if the company decides to let you keep your coverage, that plan could be the primary payer or the secondary payer depending on the group plan and the number of employees within the plan. Medicare.gov explains the various scenarios and their respective payout order very well. The point is you should always check to see if taking on a job during retirement will change your coverage.
Retirement means different things for different people. The best way to ensure you are making smart financial moves in your golden years that align with your overall retirement vision is to educate yourself. Remember, income has a domino effect that touches many facets of your financial life. Understanding its correlation and impact toward other areas is vital. And don’t forget to factor in “the good stuff.” It is just as important!
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Source: Smart Balance/ Money.US News/ Kiplinger/ Forbes/ Nerd Wallet
© Geier Asset Management, Inc. August 2019. Dan Mules, CPA is a Client Manager and Tax Planning Professional for Geier Asset Management, Inc., a Registered Investment Advisor. The articles & opinions expressed in this material were gathered from a variety of sources, but are reviewed by Geier Asset Management, Inc. prior to its dissemination. All sources are believed to be reliable but do not constitute specific investment advice. The views expressed are those of the firm as of August 2019 and are subject to change. These opinions are not intended to be a forecast of future events, a guarantee of results, or investment advice. Any advice given is general in nature and investors must consider their own individual circumstances. In all cases, please contact your investment professional before making any investment choices. Geier Asset Management, Inc. is not responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.