(Adam Levy)
Working in retirement has become more and more prevalent in the US While the percentage of participants in most age groups is declining, there’s an ongoing increase in participation by those 75 and older, according to data and forecasts from the Bureau of Labor Statistics.
Some would-be retirees are forced to continue working, as they don’t have enough retirement savings to cover the gap between their cost of living and Social Security benefits. But even wealthy Americans may choose to continue working in retirement for various reasons.
Here are two pros and two cons to working in retirement.
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Pro 1: Extra income
Who’s going to say no to extra money?
Extra income in retirement can help supplement retirement savings and social security for those without enough to live the life they want in their 60s, 70s, and 80s. Even for wealthy retirees, some extra income can allow them to hold off on withdrawing from their retirement accounts or have some extra “fun money” so they can enjoy their retirement more.
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Extra income in your 60s can help you delay social security benefits until 70, which is likely to generate the greatest total payout over your lifetime and provides insurance against living a long life well into your 90s. If you have a high-paying job, you might increase your overall Social Security benefit, thanks to the higher earned income.
Pro 2: Better health
Having a job to go to on a regular schedule provides many health benefits.
There are physical health benefits. A job may require you to get out of bed on a schedule, get out of the house, and get moving. Maybe the job itself isn’t physically demanding (or maybe it is), but having a place to be and things to do with your day require you to be more active than relaxing at home or with friends.
The mental health benefits may be even greater. A job provides mental stimulation and social interaction, which keeps your brain sharp.
Studies have shown that people who work at least part-time in a “bridge job” between their main career and full retirement experience fewer major diseases and functional limitations than those who are fully retired. That said, it may be that those who developed major diseases and limitations were simply unable to keep working. Regardless, the evidence suggests that working, if you’re able, is good for your health.
Con 1: The impact on Social Security benefits
If you’re counting on both Social Security benefits and work to support your cost of living in your early-to-mid 60s, you might have to work more than you initially thought. That’s because the Social Security Administration will reduce your benefits (temporarily) if your income exceeds a certain threshold.
Specifically, if you’re under your full retirement age (FRA) for all of 2022, you will see a $1 reduction in your benefits for each $2 you make above $19,560. If you were born before Sept. 1, 1956, your benefits would be reduced by $1 for every $3 above $19,560 income in 2022.
You’ll get those benefits back after you reach your FRA. But it may mean you have to earn more at your job from age 62 onward to bridge the gap between your Social Security payments and your cost of living.
Con 2: Taxes
Extra income in retirement sounds great, but the effective tax rate on that income can make it almost not worthwhile. This may be a bigger problem for retirees in their 70s who are collecting Social Security benefits, making required minimum distributions, and potentially selling investments in a taxable brokerage account.
The Social Security Administration uses a “combined income” metric to determine how much of your Social Security income is taxed. Combined income equals your adjusted gross income plus half your Social Security benefits plus any non-taxable interest. Above a certain threshold, 50% of your Social Security benefits are taxed, and a slightly higher threshold makes them 85% taxable. That means at a certain point, each $1 you earn from a job could generate $1.85 in taxable income.
The problem is exacerbated if you must also take required minimum distributions, which count toward your income.
Additionally, you may miss out on the 0% long-term capital gains tax rate if your income rises above that threshold, resulting in even more taxes paid on just $1 of additional income.
While you won’t pay more in taxes than your additional income from working, you may need to be more mindful of your tax planning when you have a job in retirement.
Overall, however, the positives of working in retirement far outweigh any of the negatives. So, if you have the desire to keep working and you’re in a position to do so, you may want to pursue work.
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