Claudius the Antagonist

To Work or Not To Work in Retirement, That is The Question

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It can be difficult leaving the pace of full time work for retirement.  For many retirees, a job provides additional income, stability, and the chance for a new routine.  However, combining income from social security, 401K plans, pension plans, interest, dividends and capital gains, with part-time earned income can create a confusing tax situation. There are many factors to consider when deciding whether or not you will work a part time job in retirement. Let’s look at the pros and cons of working in retirement to help you make the most informed decision possible and give you the retirement lifestyle you deserve.

The Pros: Hamlet the Hero

There are many benefits to be derived from working in retirement. Your reasons could be financial, personal, or both!  Take a look at some of the top reasons people elect to continue working during and throughout retirement.

Healthcare Benefits

Once you stop working, your healthcare benefits are no longer provided through your employer. Many retirees have a hard time finding healthcare plans that match their needs and having it as a benefit through an employer is much easier to manage.

Mental Agility

Age is but a number, and people want to stay mentally sharp as they age. Working can allow people a space to exercise their talents, groom new ones, and stay on top of the changing economic, business, and political landscapes.

Community Development

When you retire, many things change. One of the most important things that new retirees forget is that they need a community to stay happy and healthy. The social interaction that other people provide is necessary, and can be difficult to form.  Working in retirement gives you a built-in foundation for developing relationships with your new co-workers.

Passion Project

Have you always wanted to make specialty soaps and bath bombs, but haven’t had the time? Or maybe you are a musician and want to give lessons? Working in retirement allows you the ability to engage in work you are passionate about but haven’t had the time to be able to pursue.

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? This section is here to inform you of some of the cons that exist for working retirees. Most of the cons stem from increased tax liability and higher medicare premiums.

The Problem With Taxes

While working in retirement can be fulfilling, it is important to know that there are many potential tax ramifications that come along with it.  Combining your earned income with assets, pensions, social security, and 401k, many retirees find themselves in a higher tax bracket and unprepared for the large check they are responsible for writing to the government.

Required Minimum Distributions

Picture this: the income from your part time job mixed with other investments means that you don’t have to withdraw from your 401K or IRA plan, awesome! But once you turn 70 ½ the required minimum distribution kicks in, meaning that you have to take out a set amount of money once you hit that age. But your job is going great and you want to save that money in your account so you decide to take out less than the required minimum amount.

Oops…now you not only have to pay tax on the amount of money you did not withdraw, you are also faced with a 50% penalty fee. This is a good lesson to make sure you withdraw money from your 401K or IRA accounts wisely and consistently.

Capital Gains Tax

Tax brackets are crucial to understanding your tax situation in retirement. It is good to note that your tax bracket is determined by all of your income sources. If your work in retirement moves you from the 10%-15% tax bracket up to the 25% bracket, you will be required to 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 are looking to sell some real estate holdings for income, the gain from the sale will count toward your income taxes and your tax bracket.

Social Security Tax

Many retirees are surprised to learn that their Social Security benefits are subject to federal taxation. The income you receive in retirement is determined by a combination of many factors: retirement account withdrawals, dividends, general earnings, and 50% of your Social Security benefits. These numbers are added up to determine the taxable portion of your Social Security benefits.

If your income exceeds $25,000 as a single person or $32,000 if you are married, up to 85% of your benefits could be taxed.

Medicare Excess Premiums

Medicare is now means tested and the income thresholds include your full Social Security benefit.  I your income falls over a threshold, even by one dollar, you end up paying an extra Medicare part B and D premium.  In the scope of your entire tax bill, it might not seem like much, but it can be significant over the course of an entire year.  The premiums are based on your income from two years ago, so it’s important to plan ahead when you consider how much to withdraw from various accounts.  

To Thine Own Self Be True

There are so many options when it comes to retirement. It is important to customize your retirement plan to 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?

The fact is that there are a lot of ways to control taxes by planning in advance to create a tax efficient retirement plan.  Planning for retirement earlier rather than later can help you determine if working part time in retirement is the right move for you.

No matter what you decide, you always have support. And if you would like a more personal and in depth look at your financial plan for retirement, we would love to talk with you.

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