It used to be that retirement was a hard stop to decades spent in the workforce, with the promise of much travel, catching up on long-lost hobbies, and time spent with grandkids.
But these days, retirement is less of a destination and more about change, as increasing numbers of people are sunsetting one career and embarking on a new work journey. The “why” behind this trend has to do with a number of motivations, from losing that sense of purpose felt when going into work every day, to needing to shore up retirement finances.
Whatever it is that’s causing you to consider re-entering the workforce after you’ve reached your full retirement age, consider the financial pros and cons.
PRO: Working in retirement can supplement your income
You may live for decades after retirement, based on current life expectancies, and life requires funds. Even if you have adequate savings in your retirement plan or other investments, if you’re healthy and desire to work, it may make sense to continue to pull in a paycheck and keep your investments earning at the same time.
PRO: You can delay collecting Social Security benefits
If you start collecting Social Security when you’re first eligible (at age 62), you could reduce your benefits by as much as 30%. The longer you wait to start receiving Social Security, the larger that monthly benefit will be.
PRO: You may save on health insurance costs
Medical care costs might seem to skyrocket once you leave the workforce, and especially if you retire before you’re eligible for Medicare at 65. If you continue to work, you may be able to take advantage of your employer’s healthcare benefits, as well as other benefits, and save thousands of dollars a year. You can also keep your Medicare benefits when working as primary or secondary coverage. (However, be aware that if you’re a high-income earner, you may face Medicare surcharges.)
CON: You could miss out on Social Security benefits
This one may affect you if post-retirement, you start collecting Social Security benefits, and then decide to return to work. You can certainly go back to work, but once you hit the earnings threshold, your Social Security check will decrease. If you’re under 65, you’ll lose out on $1 for every $2 earned if you earn more than $18,960. The year you reach age 65, that threshold increases to $50,520, and your benefits will be reduced by $1 for every $3 earned.
CON: You may pay more in taxes on retirement benefits
If you have multiple sources of income, you may owe more tax than you’re expecting. The Social Security Administration uses “combined income” to determine taxes on your benefit. Combined income is calculated using your adjusted gross income, plus nontaxable interest, plus one-half of your yearly Social Security benefit. If that total exceeds $34,000, up to 85% of your Social Security benefit can be taxed.
CON: You might have pension penalties
If you receive a pension and return to work, it might affect your benefits. To continue to collect a pension if you go back to work for the employer that issued that pension, you’ll probably need to be rehired as a contractor or part-time employee. If you go work for a different employer, on the other hand, you will usually still be able to collect a pension.
Returning to work after retirement requires a number of careful considerations and full knowledge of how it will impact your finances. Contact us at Ironwood Wealth Management to learn more and discuss the best opportunities for you to generate income in your retirement years.