How will working during retirement affect my retirement benefits?
Many retirees choose to continue working when they retire. Some people are forced to continue working to meet their financial needs and some choose to work as part of their retirement lifestyle. Regardless of the reason you continue to work during retirement you should understand how continuing to work affects your retirement benefits, such as Social Security, pension plans, health care and other retirement plans.
Social Security benefits
It’s important to know that income you earn after you start receiving Social Security may affect the amount of your benefit check. Luckily, if you haven’t reached full retirement age you don’t need to worry about your benefits being reduced from additional earned income (except for taxes discussed below). Full retirement age is 65 to 67, depending on when you were born. At full retirement age you can earn as much as you want without reducing the benefit, but if you haven’t reached your full retirement age your benefits may be reduced by your earnings. Your benefits are reduced by $1 for every $2 dollars you earn over the “earnings limit”. In the year you reach your full retirement age benefits are reduced by $1 for every $3 dollars you earn over a higher special earnings limit until the month you reach full retirement age. Sound complicated? It can be; so make sure you consult with your financial professional if you are thinking about working and receiving Social Security. Social Security generally takes into account income items such as wages and self-employment earnings. Income from items like IRAs, investments, annuities and pensions generally won’t reduce your benefit.
On the plus side your Social Security monthly benefit is based on lifetime earnings. This is your primary insurance amount (PIA). Every year your PIA is recalculated, which means any new earnings might increase your benefit. Consequently, continuing to work could increase your future Social Security retirement benefits. The trick may be to analyze your possible reduction in benefits from working vs. potential increase along with the net cash flow your lifestyle ultimately requires.
Social Security taxation
Generally Social Security benefits are not subject to federal income tax, unless you have too much additional income! Unfortunately, any taxable income or tax-exempt interest is generally part of a formula that determines how much of your benefits are taxable. This will affect you no matter how old you are. Even taxable distributions from your IRA through required minimum distributions can cause your Social Security benefits to be taxable. This is another area that you should consult with your financial professional on. There are income thresholds you can try to stay under to limit the amount of tax your pay on your Social Security benefits. You can be a vastly more tax efficient retiree if your income planning takes the Social Security tax rules into consideration.
How will working affect my pension?
In normal situations your pension benefit is what it is. You can receive a salary from an employer and still receive your pension benefits from your prior employer, but if you still work for your original employer past retirement age or you retire and later return to work for that employer, it may impact your pension benefits and options.
Some plans may suspend your pension benefit if you work beyond your normal retirement date, while others may allow you to still receive your benefit. Some plans increase your computed benefit while your pension is suspended because you are working and some plans may limit this increase in benefits computed. A common practice is for the employer to allow for a phased retirement option. This allows the employee to work part-time while receiving all or part of their pension benefit. The important lesson to recognize is that there are different options an employer can take and you should discuss them with your plan administrator before making any hasty decisions.
Working after 70 1/2 may also open the door to contributing to a Roth IRA if you have earned income, or deferring required minimum distributions if your employer offers an active 401k plan.
Some people consider working part-time during retirement to retain medical coverage. Normally employers require a minimum number of hours to be eligible for medical benefits and some will offer benefits for part-time workers. Working part-time may be a good option for you if health benefits are offered, but what if they aren’t? If they don’t offer benefits for your part-time work you may be eligible for COBRA or you may need to look for private insurance. COBRA is usually available for 18 months after a qualifying event (such as a loss of coverage because you decreased to part-time). Of course, COBRA may be expensive with an additional 2% administration fee charged and it’s not available to employers with fewer than 20 employees. Private insurance can also be very pricy. When you turn 65 you will be eligible for Medicare benefits. Make sure to contact the SSA office around 3 months before your 65th birthday to discuss those options. Being late can be costly!
Working during retirement can have great benefits. Some people feel they will be healthier by staying mentally and physically active. You may enjoy the social benefits of continuing to work. Even if your income affects your other retirement benefits, the additional income should help your retirement savings last longer overall. Proper consideration of your benefits are still essential to being a tax-efficient retiree and a retiree who gets the most out of their retirement benefits. Considerations vary far beyond the scope of what was just discussed. Make sure to sit down with your financial professional and create a proper plan when you decide to work during retirement.