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There is a current saying that 80 is the new 60. In fact, most people without disabilities or chronic medical conditions now live into their 90s. Working after retirement is usually possible, from a physical standpoint. But is it a good idea?
5 Benefits of Working After Retirement
- Additional financial security
- Social activity and health
- Better health insurance
- Improved cognitive engagement
- The morality of work
Many people believe that additional earnings are the only benefit of working after retirement. Money may be one reward of reemployment, but it’s certainly not the only benefit. Most people are physically capable of working after retirement. And, in many cases, working after retirement might make financial sense. Additionally, as mentioned above, working after retirement has some definite perks for you and your family.
1. Increased Financial Security
Approximately 40% of retired Americans rely exclusively on Social Security benefits in retirement. So, not everyone needs or wants additional income during retirement. But if you do want or need extra money, and you have no investment income, a job is about the only way to get it.
2. Social Activity and Health
Many people in their 60s have worked at the same place for several years or several decades. It is not easy to walk away from these relationships. And the physical activity of work is usually good for people in their 60s and older. Physical activity greatly reduces the risk of a serious fall and other health issues, like arthritis.
3. Better Health Insurance
Generally, Medicare is a good healthcare alternative for people over 60. But in many cases, private insurance is a better choice. For example, Medicare is a personal policy. It does not cover dependents. That’s an important consideration if you have dependents at home, such as a grandchild. Furthermore, Medicare usually requires a monthly premium. If the retiree wants a Medicare supplement, the premium could be significant. Most employer-provided employee benefits packages are either free or quite inexpensive for individuals.
4. Improved Cognitive Engagement
This benefit dovetails with the social interaction benefit mentioned above. Working helps minds stay sharp. These individuals typically have superior social skills. Poor cognitive skills don’t necessarily make one an invalid. But they do make it more difficult to function effectively.
5. Moral Issues
Whether we know it or not, we are wired to work. Many Americans cling to the basic Puritan values of hard work, self-control, honesty, and responsibility. Retirement runs counter to the hard work value. Some retirees can feel out of place or even useless without working. These feelings are quite normal, and in most cases, only working after retirement addresses this issue.
A generation ago, working after retirement was almost unheard of. There were too many negatives, particularly from a physical standpoint. Today, many of these physical impediments are gone, at least in most cases. So, you and your family have additional choices in this area. Working after retirement might well be the right choice when you consider all factors.
Can I Collect Retirement Benefits and Work at the Same Time?
Absolutely. As late as the 1970s, most employers had mandatory retirement policies. These employers did not hire any workers older than a certain age, usually 65. Today, these policies are generally illegal.
The Medicare rules are rather straightforward. Cash benefits are a different story. Under current law, once retirees reach FRA (Full Retirement Age, which is 66 and eight months), wage income earnings do not affect Social Security benefits. For younger retirees, earnings limitation rules vary according to age, and these rules are rather complex.
All Retirees and Health Care
Regardless of whether the individual works after retirement, Medicare eligibility usually begins at 65. A physical disability is the largest exception. Normally, however, employment status does not affect Medicare eligibility.
If you are eligible for Medicare, you should probably enroll during an open enrollment period. Failure to do so could mean a pricey penalty.
If you have private insurance and Medicare, you may typically choose which health care plan to use when you visit certain providers. That choice usually depends on the coverage. Prescription drugs are a good example. Sometimes, medicine is cheaper under one plan or the other.
Cash Retirement Benefits: Younger Than Full Retirement Age the Entire Year
For individuals working after early retirement, benefits amount reductions apply if the retiree’s earnings exceed $18,240 per calendar year. The SSA reduces cash benefits by $1 for every $2 of employment income above the annual limit cap.
Assume Juan, who is 62, files for Social Security benefits on January 1. That’s also his birthday. In terms of benefits, he’s entitled to $600 a month ($7,200 for the year). Further, assume Juan plans to keep working. His scheduled earnings are $1,933 a month ($23,200 for the calendar year) in covered employment wages.
$23,200 is $4,960 above the annual earnings limit. Therefore, Juan would lose $2,480 in Social Security benefit payments (one dollar in benefits for every two dollars of wage income).
The SSA does not withhold a bit from each check. Instead, Juan would receive no money from January through May. Beginning in June, he would receive $600 per month. Mathematicians might notice that Juan should have received some money ($520 to be exact) as a pro-rata portion of his May Social Security benefits. Sometime during the next calendar year, the SSA will pay the residual benefit amount to Juan.
Cash Retirement Benefits: Older Than Full Retirement Age for At Least Part of the Year
If the individual turns 66 and eight months old during the year, the same basic benefit payment principles apply. However, the earnings limit roughly triples, to $48,600. Additionally, the proportion also changes. For every $3 of wage income, the SSA withholds $1 of retirement benefits.
Now assume Juan files for retirement benefits on January 1, 2020. He reaches age 66 and eight months (Full Retirement Age) on December 30, 2020. He plans to work throughout the year and earn $4,500 per month ($54,000 for the calendar year).
The way the math works out, the financial consequences for Juan would be somewhat less severe. Since his covered employment earnings would be $5,400 over the earnings limit, Juan would lose $1,800 in benefits (3:1). Therefore, according to SSA withholding rules, Juan would receive no benefits until March. From that time forward, he would receive his full $600 check.
How does the SSA define employment income? Wage and salary income are both “income” in this context. Anything else, including dividends, interests, and capital gains, is not income.
On a related note, the manner of calculation differs. For employed persons, the SSA counts income when it is earned, not when it is paid. For independent contractors and other self-employed persons, the SSA counts income when it is paid, not when it is earned.
Moreover, if your employment situation changes, keep in mind that the SSA only makes adjustments once a year. Therefore, if their situations change, these individuals should contact the SSA straightaway. It is also a good idea to double-check the SSA’s arithmetic. These formulas are very complicated, and we all make mistakes from time to time.
If I Work After Retirement, How Does That Affect My Tax Bill?
In many cases, federal income tax is the highest post-retirement expense. Paying taxes on earned income is only part of the equation.
Employment Income and Retirement Allowance Income
Many people are surprised, or even shocked, to learn that Social Security payments could be taxable. Depending on your income and some other factors, up to 85 percent of your benefits could be taxable. Furthermore, in this context, there is no marriage tax break.
Publication 915 covers most of the IRS rules in this area. Essentially, retirees must add one-half of their Social Security benefits, their earned income (wage or salary), and their unearned income (interest and dividends) to determine their Base Amount. If the BA is more than a certain threshold, part of the Social Security benefits is taxable.
Folks over 65 are usually eligible for the Health Coverage Tax Credit and/or the Credit for the Elderly and Disabled. Generally, if your remaining individual employment income exceeds $11,850 ($23,100 for married couples), you probably owe federal income tax.
Retirement Account Income
Disbursements from traditional IRAs, 401(k)s, and other defined contribution retirement accounts are usually taxable. If you are working and receiving payments from an employer-affiliated retirement account, your employer probably withholds taxes. That withholding generally affects your liability. Other factors affecting liability include the type of payment you receive. The IRS views monthly disbursements differently from lump-sum disbursements.
Roughly these same rules apply to pension payments. State rules vary significantly. Generally, the state of residence determines the applicable rules. Assume Sarah worked in Minnesota and retired to Florida. Although she earned her pension in a state which has an income tax, Florida has no state income tax. Therefore, Sarah’s tax liability might be limited.
Bequests and Gift Planning
Many retirees look to the future, and that means giving financial gifts to their future heirs. Typically, gifts under $15,000 to any one person are tax-free. The IRS limit changes frequently.
These gifts reduce the retiree’s estate, which means lower estate taxes. However, once retirees give gifts, they are gone forever. Therefore, an inter vivos trust might be a better option. The settlor (person who creates the trust) can amend the corpus (property in the trust) at any time. But that’s the subject of another blog.
Working After Retirement
The decision to work or not work after retirement seems to be a matter of personal choice. There are important physical, financial, and emotional factors to consider.
Are you physically capable of working? At a minimum, that means getting to work on time, giving your best effort throughout your shift, and staying until quitting time. If these things are an issue, and you still want to work, talk to your boss or supervisor about a schedule adjustment, move to independent contractor status, or some workplace accommodations. The Age Discrimination Act sometimes comes into play here.
Does it make financial sense to keep working after early retirement? Running the numbers usually provides part of the answer, but not necessarily all of it. For example, in some situations, the substantial emotional benefits of working after retirement might outweigh the meager financial benefits.
These emotional benefits usually involve making the most of your time. To most people, time is a more precious commodity than money or anything else. Only you and your family can address this issue. After considering all the factors, most people agree that reemployment is a good idea. The bottom line is that this is your retirement. In most cases, you can spend the time the way you want to spend it.