Pros & cons of working after retirement


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It’s easy to assume that when it comes time for retirement, retirees are happy to leave the workforce to pursue more leisurely activities.

But according to the AARP, in 2018 (the most recent year for which data is available) around 13% of retirees are still participating in the workforce — either working or looking for work. What are the pros and cons of staying in the workforce after retirement?

Related: IRA vs 401(k): What is the difference?

Is it possible to work after retirement?

While many people might associate retirement with spending days lying on a beach with a novel or cultivating a perfectly manicured garden, more people than ever are choosing to spend some of their retirement time working.

Retirees may even still be able to collect benefits like Social Security while continuing to work.

The AARP found that among retirees still participating in the labor market, many were also receiving retirement benefits or payments from other sources.

In AARP’s study, 13% of retirees who were working or looking for work also received Social Security benefits; 8% received benefits from an employment-based pension; 4% drew money from an IRA; 3% drew money from a 401(k); and 2% were receiving pensions based on military service.

Taking a job in retirement might provide extra income, structure and social connection, but it may also interfere with the amount of benefits a retiree can receive under Social Security and could affect their taxes.

That’s why it is important to consider the pros and cons of working after retirement.

Working after retirement may provide extra income

One reason retirees might start looking for a new job after retirement is that their retirement benefits are not enough to comfortably cover their lifestyle. This might happen if a retiree didn’t save enough for retirement, if their cost of living increases, or even if they face an unexpected financial emergency or medical setback.

For many, working during retirement is a way to offset some of the financial stress that may arise from living on retirement benefits alone, especially in areas with a high cost of living.

On the other hand, jobs after retirement can also provide extra “fun money” that allows retirees to check off some of those bucket list items that may not have been possible before retirement, like extended vacations or even a down payment on a dream vacation home.

Plus, if a retiree continues to work in a traditional job after retirement, they will continue to pay into Social Security, which means they may increase the amount of benefits they receive when they do start to take Social Security.

Working after retirement may help ease boredom

Taking on work after retiring may also be a way to combat boredom after turning in the office keycard. While many people are counting down the years to retirement, some may be caught off guard when they are left with years of unscheduled time ahead of them.

For example, retirees may be used to going to a job that provides mental stimulation every day for 30 or 40 years. A change in that routine, especially for workers who enjoy their jobs, could result in boredom when a retiree is suddenly faced with filling long days with no plan.

Going back to work after retirement may help to ease some of that boredom. Some retirees might choose to return to an old passion, pick up a new job to learn new skills, or even take on a job focused on charity or giving back.

The AARP even runs a program that helps older adults and retirees train for new jobs and matches them with local employers.

Worried that a post-retirement job might take up too much time? Working part-time in retirement might give a retiree the excitement of a job combined with the benefits of a more flexible schedule.

Retirees may opt for a part-time job in retirement so that they don’t need to choose between the mental stimulation of work and the earned retirement relaxation of a day in a hammock.

Working after retirement may help with social engagement

In addition to giving structure to every day and helping keep boredom at bay, working in retirement might help a retiree stay socially engaged.

One unforeseen side effect of retirement and leaving the workforce may be realizing that many friends are also officemates. After retirement, it might be hard to make new connections.

Taking on a job after retirement, even working part-time in retirement, may help foster new friendships and even possible romance.

Are there downsides to working after retirement?

Before a retiree decides to take on a job after retirement, however, it is important to consider any possible downsides.

While taking a job after retirement may provide needed income as well as a way to combat boredom, keep mental skills sharp and meet new people, there may also be serious downsides to taking on that side gig.

For example, a post-retirement job might affect Social Security benefits or even how much is owed in taxes.

Working in retirement may affect Social Security benefits

First, it is important to know that working in retirement could affect what retirement benefits are received. For example, Medicare eligibility and Social Security benefits may both be affected by income earned at a post-retirement job.

Retirees might still be eligible to take Social Security benefits even if they’re working a post-retirement job, but it depends on the person’s age and their income.

In order to know if post-retirement income will affect Social Security benefits, workers need to know their “full retirement age.”

The full retirement age is the age at which retirees become eligible for full, non-reduced Social Security benefits.

Although eligible workers can technically begin to collect Social Security benefits anytime between ages 62 and 70, retirement benefits may be reduced by a percentage until the retiree reaches their “full retirement age.”

Currently, people born between 1943 and 1954 have a full retirement age of 66. For each birth year after 1954, the Social Security Administration adds two months to determine “full retirement age” until the year 1960.

This means the full retirement age for people born in 1960 or later is 67, but for someone born in 1956, the full retirement age is 66 and four months. This chart from the Social Security Administration explains in further detail.

Knowing the full retirement age is important because Social Security earnings may be affected if a retiree takes out Social Security benefits before reaching full retirement age and earns over a certain income each year.

If a retiree is younger than full retirement age and makes more than the yearly earnings limit, earnings may reduce their benefit amount.

If a retiree is younger than their full retirement age, Social Security deducts $1 of payments for every $2 earned over the annual income limit.

For 2020, the annual income limit us $18,240. If a retiree’s annual income exceeds that amount thanks to a new job, benefits decrease.

In the year a retiree reaches full retirement age (before their actual retirement age birthday), $1 of benefits is deducted for every $3 made above the annual income limit.

The good news is that once a retiree reaches full retirement age, they can work without facing a reduction in Social Security benefits.

These restrictions and limits change annually, so workers might want to check with the Social Security Administration to determine how taking on work in retirement could affect benefits.

Working in retirement may change taxes

In addition to changes to benefits, working in retirement could change a retiree’s taxes. Social Security benefits might be taxed if a retiree has a combined income over a certain threshold. This includes income, nontaxable interest and up to 85% of Social Security benefits.

If a retiree files their taxes individually, and their combined income — adjusted gross income plus nontaxable interest and up to half of their Social Security benefit — is between $25,000 and $34,000, they could be taxed on up to 50% of their Social Security income.

If a combined income is more than $34,000 thanks to working after retirement, they might be taxed on up to 85% of their Social Security benefits.

If a retiree does end up paying taxes on their Social Security, it can be paid in either quarterly installments or withheld from benefit payments.

Of course, workers taking jobs after retirement will also have to pay normal state and federal income taxes on the income earned in their new, post-retirement jobs, as well as Social Security and Medicare taxes.

Planning for retirement

Whether or not someone plans to work after retirement, it is advisable to start planning for retirement early so that retirees don’t feel financially obligated to continue working or take on a new job after retirement if that is not what they want.

Planning for retirement doesn’t need to be stressful. Workers could even consult an online retirement calculator to help them nail down specific numbers to work toward.

Retirement may mean utilizing a 401(k), an employer-sponsored retirement plan that might help reduce the amount of saved money that ends up being taxable.

Workers may also set up an IRA, which is a different type of retirement account that allows workers to save up to $6,000 per year, pre-tax ($7,000 for those age 50 or older). Workers may also consider using a brokerage account to invest their way toward retirement.

An investment account doesn’t have the same tax-protections as a retirement account, but it could be a good option for those who are looking to save more than the annual limit a retirement account allows or who have extra income they want to put to good use.

Diversification across thousands of assets can help reduce, but not eliminate, your risk, and your portfolio is rebalanced once a month to keep it in line with your investment goal and risk tolerance. It’s important to know that investing in the stock market always has a risk of loss.

Whatever your plan for working after retirement is, having a plan in advance could help you stay on track.

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