A job is about more than an income.
It offers a sense of stability, provides a consistent routine, and helps you develop a personal network. If you’re worried about losing all that in retirement, it’s entirely possible to continue working beyond what you originally planned. In fact, many retirees enjoy staying busy and earning extra income.
But there are many factors to consider before deciding to continue working part-time during retirement. Below we’re identifying a few pros and cons of extending your working years into retirement.
We hope to help you make an informed decision while pursuing a retirement lifestyle that suits you best.
The Pros: Hamlet the Hero
Whether it’s to build a financial cushion or feel more personally fulfilled, there are plenty of reasons to continue working in retirement. Here are a few of the most common reasons why working during retirement is beneficial.
Leaving your job means leaving your healthcare benefits behind. Most individuals are not eligible for Medicare until they turn 65. If you retire before this age, it falls on you to find a suitable health insurance plan. Healthcare.gov is a federal marketplace that allows unemployed individuals not yet eligible for Medicare to obtain healthcare coverage at a reasonable cost.
However, depending on your employer’s benefits, you may find that their offerings are more affordable or more robust than what you find on the marketplace. If that’s the case, working into retirement could provide you with optimum healthcare coverage until Medicare kicks in.
You want to stay mentally sharp as you age. Working, even part-time, provides ample opportunity to exercise your talents, develop new ones, and address thought-provoking challenges. Neglecting to stay mentally active puts you at greater risk of developing diseases like Alzheimer’s or Dementia.
When you leave your job, you say goodbye to long-time coworkers and friends. Many of us don’t realize how fundamental our work relationships are until they’re gone. For that reason, transitioning to retirement can be a surprisingly lonely endeavor.
Picking up a part-time job in retirement allows you to meet new people and develop fresh relationships. A job gets you out of the house and around people you otherwise wouldn’t get the chance to meet.
Our list of passion projects grows longer the older we get. But during our working years, we just don’t have time to get to the “fun stuff.” Working in retirement doesn’t mean you have to work for someone else.
Use this time to sell crafts at a local market, build an online Etsy shop, offer music lessons, or develop a freelance business. This is the time to engage in the work you’ve always been passionate about but haven’t had the time to pursue.
Increased Cash Flow
Of course, any work you do in retirement will bring in more income. And extra income is helpful for several reasons—use it to fill gaps in your savings plan, develop a more robust emergency fund or put it toward larger savings goals (such as a grandchild’s college fund).
An increased cash flow provides a nice cushion for supplementing your retirement income plan. In addition, earning income from a job may allow you to delay Social Security benefits. Remember, the longer you wait to begin receiving benefits (until age 70), the more you receive.
The Cons: Claudius the Antagonist
You may be thinking; there are so many great perks to working part-time in retirement. Why wouldn’t I do it? Before pursuing employment, there are some important considerations to make first, including increased tax liability and higher Medicare premiums.
The Problem With Taxes
While working in retirement can be personally fulfilling, it’s not without its tax consequences. Combing all your retirement assets, including earned income, distributions, pensions, Social Security, dividends, etc., could put you in a higher tax bracket than expected.
We recommend working with a knowledgeable financial advisor to determine how earning additional income in retirement will impact your tax obligations.
Required Minimum Distributions (RMDs)
It’s excellent that earning additional income in retirement means you don’t have to tap into your retirement savings quite yet. But when you turn 70 ½ (or 72 if the new rules apply to you), your required minimum distributions (RMDs) kick in for your 401(k)s and IRAs. When that happens, you have to withdraw a set amount of money every year.
If you don’t take your required minimum withdrawals, you face severe tax penalties. Not only do you pay tax on the amount of money you didn’t withdraw, but you face a 50% tax penalty as well. Even if you’re earning enough through your job to meet your needs, you still must take your RMDs to avoid penalties.
Food for thought: If you’re charitably inclined, you can donate all or part of your RMDs via a qualified charitable distribution (QCD). That way, you satisfy your RMD and boost your charitable gift.
Capital Gains Tax
Pay attention to tax brackets when working in retirement. Your taxable income is determined by many income sources, not just what you earn from a job.
Say your earned income from working in retirement moves you from a 10%-15% tax bracket up to a 25% tax bracket. In this case, you must pay a 15% capital gains tax. This tax creeps up on people most often when they rely on selling assets for additional income sources. For example, if you sell real estate holdings, those earnings could count toward your taxable income.
Social Security Tax
Did you know that Social Security benefits are subject to federal taxes? If your combined income exceeds a certain threshold, a portion of your Social Security benefits will be taxed—up to 85%!
Combined income refers to all income sources, including earned income from a job, dividends, retirement account withdrawals, etc.
The 2022 income thresholds are:
- Individual filers: If you earn between $25,000 and $34,000, you may pay income tax on up to 50% of benefits. If you earn over $34,000 in combined income, you may pay tax on up to 85% of benefits.
- Joint filers: If you earn between $32,000 and $44,000, you may pay income tax on up to 50% of benefits. If you earn over $44,000, you may pay tax on up to 85% of benefits.
Medicare Excess Premiums
If you earn over a certain amount, you’ll pay extra for Medicare part B and D premiums. These premiums are determined based on your income from two years ago, which means it’s crucial to plan ahead when considering your combined income in retirement.
The SSA will look back at your 2020 tax return for this year. Here is a resource from the SSA on how much you can expect to pay in Medicare premiums for 2022.
To Thine Own Self Be True
Your retirement plan should fit your lifestyle needs, wants, and desires. Non-traditional retirement plans are becoming more and more popular, and who says you have to do things by the book?
If working in retirement feels right to you, connect with a financial professional who can help you prepare for and understand your potential tax obligations. Making these considerations earlier rather than later is important in determining if part-time work is a good move.
No matter what you decide, you always have support. If you would like a more personal and in-depth look at your financial plan for retirement, we would love to talk with you.