Working in retirement? Here’s Why It’s Great…and Why It’s Really Not

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 take 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 advantages, but there are also some disadvantages to be aware of.

Person sitting at a table looking at a laptop.

Image source: Getty Images.

The benefits of working in retirement

Working in retirement can benefit your mental, physical and financial health. People who continue to work in their 60s, even part-time, have lower rates of diagnosis for conditions 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 before retirement have experienced fewer serious illnesses.

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 to inflation starting at age 60, so if you’re working full-time in your 60s, you can replace years of low wages that no longer receive inflation adjustments every year. year. This could lead to greater Social Security scrutiny down the road.

If you’re using a job to supplement your retirement income, this can be a big help. If you use the 4% rule, every $10,000 more you earn in annual salary gives you the same boost as if you had $250,000 more in your wallet.

The disadvantages of working in retirement

Working in retirement is not all rosy. This means sacrificing autonomy and could complicate your finances.

If you are working in retirement, you may not have as many opportunities to enjoy your time as you would like. While earning extra cash 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 work for yourself, you don’t have much control over your job. You entrust a large part of your retirement plans to a third party who could choose to terminate your employment at any time. Additionally, you may become unable to do the job due to a disability or other unforeseen factors.

The rules around Social Security throw another wrench into the picture. If you apply early and continue to work, you will be subject to Social Security earnings testing. If you earn too much, the government will reduce your benefits. Therefore, if you do not plan for the reduction in benefits, you may end up falling short of your planned budget.

On top of that, your financial planning will become much more complicated if you’re working into your 70s. At this point, you will collect Social Security benefits and must begin collecting the required minimum distributions from your IRA at age 72 (although you can avoid collecting RMDs from your current employer’s 401(k)).

With all sources of income, you may need to become more mindful of the thresholds at which Social Security becomes taxable income. You could end up with a much larger tax bill than expected when you have income from many different sources, including employment.

Start planning today

If you want to work in retirement, this is a good choice to make. But be sure to plan for the downsides of working in retirement.

A good plan can mitigate the risk that your job doesn’t go as planned and you have to stop working sooner than expected. A good plan can help you navigate and prepare for the tax consequences of working well past 70 and will be flexible enough to change as circumstances change.

There are many reasons why working in retirement is great. But it could also become a bigger headache than you imagined without proper planning.

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