For many Americans, the idea of “retirement” still includes some type of work. More and more Americans are extending their careers into their late-60s. Some are taking part-time jobs to supplement their retirement savings and Social Security, and some see it as a way to stay active and keep their minds sharp.
Earning income from a job in retirement certainly has its benefits, but there are also some drawbacks to be aware of.
The benefits of working in retirement
Working in retirement can support your mental, physical, and financial health. People who continue working in their 60s, even part-time, exhibit lower diagnosis rates for diseases such as high blood pressure, diabetes, cancer, lung disease, heart disease, stroke and psychiatric problems. In particular, studies have historically shown that those who continue to work in the same career as they did pre-retirement have experienced fewer major diseases.
Beyond the health benefits, employment also helps your finances. Working well into your 60s can actually give you a Social Security boost. Social Security stops indexing your wages for inflation starting at age 60, so if you're working full-time in your 60s, you may be displacing years of low wages that are no longer getting inflation adjustments every year. That could result in a bigger Social Security check down the road.
If you're using employment to supplement your retirement income, it can be a major help. If you use the 4% rule, every extra $10,000 you earn in annual wages gives you the same boost to income that having an extra $250,000 in your portfolio would have.
The drawbacks of working in retirement
Working in retirement isn't all roses. It means sacrificing autonomy and could complicate your finances.
If you're working in retirement, you might not have as many opportunities to enjoy your time as you see fit. While earning extra money is great, what good is it if you can't use it the way you want because you have to go to work every day?
More importantly, unless you're working for yourself, you don't have much control over your employment. You're putting a lot of your retirement plans in the hands of a third party who could choose to lay you off at any time. Furthermore, you may become unable to do the work due to disability or other unforeseen factors.
The rules around Social Security throw another wrench into the picture. If you claim early and continue to work, you'll be subject to the Social Security earnings test. If you earn too much, the government will reduce your benefits. As a result, if you don't plan for the benefits reduction, you may find yourself coming up short of your planned budget.
On top of that, your financial planning will become a lot more complicated if you're working into your 70s. By that point, you'll be collecting Social Security benefits and have to start taking required minimum distributions from your IRA at age 72 (although you can avoid taking RMDs from your current employer's 401(k)).
With all the sources of income, you may need to become more mindful of the thresholds for when Social Security becomes taxable income. You could end up with a much bigger tax bill than expected when you have income coming from lots of different sources, including employment.
Start planning today
If you want to work in retirement, that's a fine choice to make. But make sure you plan for the downsides of working in retirement.
A good plan can mitigate the risk that your employment doesn't work out as expected and you have to stop working earlier than planned. A good plan can help navigate and prepare for the tax consequences of working well into your 70s and will be flexible enough to change as circumstances change.
There are a lot of reasons working in retirement is great. But it could also become a bigger headache than you imagined without proper planning.
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