Retired and Ready to Return to Work? Consider These 4 Issues
A regular paycheck may affect Social Security benefits, Medicare coverage, private pensions and your tax bill
Amid rising inflation and a volatile stock market, many retirees are heading back to work. In April, Hiring Lab, the economic research arm of the job board Indeed.com, reported that as of March 2022, 3.2% of workers who were retired a year ago are now employed.
Unretiring can help stabilize or boost your cash flow. But it might trigger unintended consequences in other financial areas of your life, including Social Security, Medicare, pension and taxes. So, before firing off your resume, here are four things to consider:
There are two ways that working longer could have a positive effect on your future Social Security benefits.
1. Social Security
There are two ways that working longer could have a positive effect on your future Social Security benefits. First, money you earn now may raise the long-term average earnings in your benefit calculation. Second, extra income might make it easier for you to delay claiming Social Security for a few years. That's valuable, because benefits increase 8% per year for every year you delay claiming after your full retirement age, up until age 70.
However, if you start collecting Social Security before reaching your full retirement age, and then return to work, your monthly benefits might be reduced, at least temporarily.
Your check will decrease if your earnings exceed the annual earnings limit set by the Social Security Administration ($19,560 in 2022). If you don't exceed the limit, there is no impact. For every $2 you earn above the limit, your benefits will be reduced by $1.
For example, if you earn $40,560 this year, your benefits will be reduced by $10,500. The year you reach full retirement age, the earnings limit is higher ($51,960 for 2022) and your benefits are only reduced by $1 for every $3 above that limit. Once you reach full retirement age, the deferrals end and future monthly benefits will be recalculated to compensate for any money withheld previously.
To be clear, the deferral only applies to income from wages and net earnings from self-employment. It does not include pensions, government benefits, or investment income. And it only affects people who have not yet reached full retirement age as determined by the Social Security Administration; that is 66 if you were born between 1943 to 1954. Full retirement age increases gradually for those born between 1955 to 1960. For people born in 1960 or later, the full retirement age is 67.
For more information: Consult the Frequently Asked Questions section of the Social Security Administration's website.
2. Medicare
Should you keep Medicare coverage if you work for an employer that offers health care insurance? The answer to that question is complicated. There are a lot of "ifs" "ands" and "buts" to consider.
If you, or your spouse, goes to work for a company that offers health insurance, you can take it and remain on Medicare at the same time. One will be considered primary coverage, and the other is secondary. But if you remain on any part of Medicare, you cannot participate in a health savings plan if your employer offers one.
However, things get trickier if you want to maintain Medicare Part A (which is free for most people) but drop the parts of Medicare which you pay for, such as Medicare Part B (outpatient coverage) Part D (prescription drug plans) Medicare Advantage and Medigap.
Most pensions are not affected if you go to work for a new employer, but here again, there are some exceptions.
For starters, coverage rules are different for small businesses (fewer than 20 employees). If you're over age 65, Medicare is considered your primary coverage and your private insurance only pays for services that Medicare doesn't. That could leave you with significant gaps in your coverage.
Even if you work for a larger employer, who offers you cost-effective insurance, you'll need to avoid running afoul of the rules governing re-enrollment, preexisting conditions etc. when you are ready to re-enroll in Medicare coverage later. So, before you drop any part of your Medicare coverage, speak with a Medicare broker and your HR department to fully understand the impacts of your decision.
One other issue: If you earn enough, you may be liable for a premium surcharge on your Medicare Part B and Part D premiums. This could be substantial. In 2022, the average Part B premium is $170.10 per month, but higher earners pay up to $578.30 per month. You won't be hit with the increase immediately, since the government uses your tax return from two years prior to determine the cost of premiums.
To avoid any nasty surprises down the road, consult Medicare.gov to see what surcharges, if any, you could be liable for.
3. Pensions
Returning to work after retirement can affect your pension. Each plan has its own set of rules and restrictions, so make sure you check with your HR Department or pension plan provider to ensure you understand any potential issues.
Some plans allow you to collect a full pension at retirement age, others suspend pension payments and still others place limits on your earnings and hours. Most pensions are not affected if you go to work for a new employer, but here again, there are some exceptions.
4. Taxes
Finally, a return to work might bump you into a higher tax bracket, which could increase the tax bite on your investment income, required minimum distributions and other types of income. In most cases, the additional income will outweigh the tax pain, but it's wise to do a cost-benefit analysis.
