For many people, retirement doesn’t mean that they stop working. It simply means more of the same as far as their typical work day.
According to a Gallup poll, almost three out of four people said they intend to work beyond the typical age of retirement. Another study — this time from the AARP who polled working Americans between the ages of 50 and 64 — found that 37 percent of them are planning to work even after they retire from their current positions.
While this might seem to defeat the purpose of retirement, the practice can yield surprising benefits. Is working after retirement right for you? Read on to find out.
What Does Working After Retirement Look Like?
Working beyond retirement often doesn’t look exactly like their current career for many people though. For some retirees, that means that they cut back to working on a part-time basis. The same AARP poll mentioned earlier found that nearly half of those who intend to work after retiring — about 44 percent — are planning to enter new careers.
Benefits of Working After Retirement
In addition to the continued access to a regular income, working beyond retirement has a number of benefits for retirees. They continue to build up and preserve the savings that have been earmarked for retirement. Those assets that are in retirement plans with tax advantages such as IRAs can be built up even more to fund the type of retirement desired. It’s important to remember that individuals can contribute to their traditional IRAs only up until the year they turn 70½. Any income earned past that age can be funneled into a Roth IRA for an indefinite time period.
Pitfalls of Working Beyond the Age of Retirement
Most retirees who work beyond the traditional age of retirement do so because they need the money, or their current rate of pay is simply too good to pass up. This additional income could come at an unexpected cost to those who are uninformed.
1. Social Security
In most cases, working past the age of 65 is good for a person’s Social Security payment. At this point in time, the official retirement age is getting older. This means that many baby boomers won’t even be eligible for unreduced payments from Social Security until they turn 67. People born in 1960 or after cannot claim full retirement benefits until they turn 67. For every year that these payments aren’t claimed, they increase by eight percent up to the age of 70. After this point, there’s no increase in payments that materializes as the result of waiting to claim these payments.
Signing up for Social Security benefits before retirement age could be withheld on a temporary basis. As an example, if a retiree earns more than certain income cap, one dollar of every two that are earned is withheld. Once retirement age is reached, though, these payments are recalculated and retirees receive credit for the withheld amount.
2. Medicare
Just because a person of retirement age is still working doesn’t mean that they should forgo signing up for Medicare at the right time. Doing so could result in penalties and higher premiums.
This sign-up period begins three months before the month an individual turns 65. The entire period of time lasts for seven months, and not signing up during that time could mean an increase in Medicare Part B premiums. This increase could be as high as 10 percent for each 12-month period in which a retiree could have claimed Part B but did not. This penalty can be avoided by retirees who are still covered under a group health plan as long as they sign up while they are still covered by the plan or within eight months of the coverage’s end. The eight-month window also applies if the retiree leaves the job that provided the health plan.
3. Increased Taxes
Earnings generated by investments or savings, as well as income from any retirement accounts — when combined with money earned from a job — could move a retiree to a higher marginal tax bracket. As a result, the investment earnings and distributions that are taken by a retired person would be taxed at that increased tax rate. This could be an unpleasant surprise if one isn’t prepared for it.
Most retirees who work past their retirement age expect to increase their spending power once they do retire. Being aware of these challenges can make planning easier.
Regards,
Ethan Warrick
Editor
Wealth Authority