With Americans living longer, it's becoming more common to work past the typical retirement age as the cost of living continues to rise. Roughly 20% of Americans over the age of 65 are currently working or looking for jobs, according to data from the U.S. Census. If you are considering working in retirement, it's important to understand the financial impact, including the possible downsides.
Pros and Cons of Working in Retirement
A little extra income in retirement can go a long way. Every dollar you bring in is one you don't have to take out of your hard-earned savings, and you may even be able to put more aside for later years to extend the longevity of your retirement accounts.
In addition to providing a financial boost, work can also keep you active, social and on a regular schedule. It can be a tough adjustment going from a full-time job to not having much on your plate throughout the week. Part-time work in retirement can help you smooth out the transition between a busy schedule and a more relaxed one, and working part-time would still leave with enough time for hobbies and socializing.
On the other hand, continuing to work could also mean dealing with workplace hassles that you may have been happy to leave behind, such as a tough boss, a long commute or less free time to enjoy yourself. There may also be extra taxes or other financial hurdles to consider if you continue to work in retirement.
If you haven't started collecting Social Security yet, working in retirement could give you the option to start receiving your benefits at a later age. The longer you wait, the more you can collect per month from Social Security until the benefit maxes out at age 70.
However, if you've already started collecting Social Security, working could temporarily reduce how much you receive per month. If you are collecting Social Security before your full retirement age (FRA), you can earn up to $18,960 in work income without it impacting your benefit. If you earn more, every $2 earned above the limit will reduce your monthly Social Security check by $1. In that case, you wouldn't actually lose any benefit in the long run, and you'd earn a larger Social Security payment when you stop working in the future.
You can find your FRA through Social Security, which is typically between 66 and 67, depending on your birth year. Once you reach your FRA, any work income will not reduce your Social Security benefit.
Another important consideration when you're working in retirement is your tax bracket. Continuing to work could put you in a higher bracket, which would mean paying more in taxes for withdrawals from taxable retirement accounts such as a 401(k) or a traditional IRA.
In addition, working in retirement could lead to taxes on your Social Security benefits. To keep Social Security tax-free, individuals must have a combined income of less than $25,000, while joint filers can earn up to $32,000. If you earn more than that, you will owe taxes on your Social Security income.
Working could also cause you to owe a higher premium for Medicare. If you earn more than $88,000 as an individual or more than $176,000 as a married couple, you will have to pay higher premiums for both Medicare Part B and prescription drug plans.
As long as you're working, you can still add money to your retirement plans, as there's no age limit to contributions. Consider whether it would make sense to use an account that gives you an upfront deduction, such as a traditional IRA or a 401k, or one that would give you tax-free withdrawals later in life, such as a Roth IRA.
If your tax bracket is low because you're only working part-time, you may not get as much benefit from a tax deduction today, whereas a Roth IRA would let you make tax-free withdrawals later on, so you wouldn't owe taxes on the investment gains.
Tax-deductible accounts require you to start making taxable withdrawals after you turn 72 through required minimum distributions, or else you will owe a penalty. This applies whether or not you want or need to withdraw the money. A Roth IRA would let you keep money in your retirement account longer if you choose, with the option of leaving it as an inheritance.
While part-time work in retirement can have many benefits, including staying active and social, it's important to consider the potential drawbacks as well. For more help with navigating the details of working in retirement, consider speaking with a financial advisor or tax professional.