(This article appeared previously on MarketWatch.)
Some people’s retirement dreams consist of nothing more than warm weather, a cerveza on a beach, and a steady stream of best sellers to read. But for others, surprising as it may be, staying in the workforce on a part-time basis is a critical component of their retirement happiness.
It’s a growing trend among today’s retirees: We’ve seen a number of our clients interested in procuring part-time employment in retirement as a way to supplement cash flow, maintain employer benefits and stay mentally and physically engaged. But is it all fun and games working in retirement?
Working part-time in retirement may actually complicate your financial situation if you're not mindful about it.
Bringeth the Bling: Financial Pros of Working in Retirement
While the most obvious financial pro of working part time in retirement is the additional cash flow, it may be less obvious to realize what this supplementary income allows you to do from a financial planning standpoint. Every year you work may improve your earnings history, which can increase the amount of Social Security you receive. Additionally, these earnings may allow you to delay taking Social Security benefits, which increase by 8 percent every year past your Full Retirement Age (FRA,) up to age 70.
Additional cash flow may also mean that you can delay drawing down on your retirement accounts, allowing the funds therein to potentially keep growing. Anyone who knows the power of compounding knows how valuable an extra three to five years can be — especially if those extra years coincide with a bull market.
Working part-time in retirement may also mean that you’re eligible to take advantage of employer benefits, such as health insurance and contributing to tax-efficient employer sponsored plans like 401(k)s — not to mention getting the employer match, if it’s offered. As an added benefit, any funds inside your employer plan will escape required minimum distributions at age 70 1/2 and later as long as you remain actively employed.
Taketh it Away: Financial Cons of Working in Retirement
Now, the not-so-great news: Working part-time in retirement may actually complicate your financial situation if you’re not mindful about it. It’s critical to take a long-term view of your comprehensive financial plan for retirement before taking on any part-time position.
If you’re receiving Social Security, keep in mind that your benefits are taxable based on your provisional income, which includes your wages, dividends, capital gains, retirement account distributions, and 50 percent of your Social Security benefits (among other items). Having a job may mean you’ll make more money, but that extra inflow may adversely affect your Social Security benefit.
Your earned income may also put you in a higher tax bracket than you were expecting — not only for income taxes, but capital gains taxes, as well. Many retirees who have a well-thought-out planning strategy seek to take advantage of lower-income years by realizing capital gains when they’re in the zero percent capital gains tax bracket. But if your taxable income puts you at or above the 25 percent income tax bracket, you may find yourself subject to a 15 percent or 20 percent capital gains tax rate.
Let Your Passions Guide You
Generally speaking, working helps you stay mentally sharp, socially engaged and physically fit. This “encore” phase of your career gives you an opportunity to showcase your skill set or indulge interests that didn’t receive proper attention during your working years. This is the time to specialize in what you truly love and potentially dive into an entirely new industry that you’ve always been eager to learn about.
But part-time work can be a slippery slope. Retirees who go back into the workforce may easily find themselves working more than part-time, simply because they’re so valuable and/or good at their jobs. While it’s nice to be seen as “the” expert, it can be difficult to set boundaries for your availability.
For those experts who hope to start their own consulting business in retirement, remember that while being self-employed might seem great (you’re in control of your schedule), all that glitters isn’t gold. The administrative and operational tasks required to run a business, even a small one, may take more time — and require more money — than you expect. And that’s even before you make your first dollar and get to experience the “joy” of payroll taxes.
If spending time with family and loved ones is a priority for you in retirement, make sure you set clear expectations about work from the beginning, lest your part-time job naturally morph into a full-time headache.
A Final Word
Modern retirees have many reasons to work part-time in retirement. Whether it’s the financial cushion or because you truly love working, it’s in your best interest to understand how this decision will change your plan for the future. Only then can you make informed, deliberate decisions to improve your life both today and tomorrow.
Remember, part-time work doesn’t only impact your financial bottom line; it also affects your mind, body, and social relationships.
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