Restarting Work After Early Retirement
Returning to work after early retirement is a decision some young retirees make after being retired for a while but realize that they still have the drive to get our there and work. Retirement doesn’t suit everyone, and although it may be come as a welcome reprieve for many, it becomes cumbersome for those accustomed to a certain lifestyle. If you are someone who has retired from work, you may want to get back out and work a little bit more so you can pursue another career, stay active, or get a steady income stream coming in again. Whatever your reasons, you have to remember that your tax situation, health insurance, social security benefits, they’ll all be affected if you return to work.
Below we’ve addressed some of the most common concerns people have, to help you determine if going back to work really is the best thing for you.
Financial issues to consider if you’re returning to work
Where returning to work will mean additional income, it will also mean additional expenses like transportation, work clothes, and daycare if you have young children, among other things. Additionally, the income you earn will incur income tax and other taxes which may change your tax situation. This additional income will affect the social security benefits you’re entitled to as well.
It’s important for you to do some calculations and evaluate how your financial situation will be affected if you return to work. It is advisable to seek advice from a financial consultant who can lay out all possible tax and SS benefit implications and give you a clearer picture of what to expect.
There may be a reduction in your Social Security benefits if you start working again
Whether this happens to you depends on your age. The Social Security Administration has laid forward the retirement age for individuals born in 1943 or later to fall between 66-67 years. If you have not reached this age yet, you may see one of the following reductions in your SS benefits.
- If you haven’t reached the normal retirement age as laid down by the SSA and return to work, $1 will be taken away from your SS benefits for every $2 that you make over the annual limit. This will apply to you if you have retired early and want to return to work before you reach the normal retirement age.
- If you are returning to work the same year as you’ve reached the normal retirement age, SSA will deduct $1 from your benefits for every $3 you make over the higher annual limit. This calculation will only include the months before you reached the retirement age. For instance, if you are to reach the retirement age in August, all your earnings until July will be considered, and if they surpass the higher annual limit, will be subjected to SS benefit deductions.
- From the month you’ve reached your normal retirement age in, your social security benefits will not be deducted, regardless of your earnings.
Note: You may want to not that benefit deductions because of the earnings test are not permanent and should not be of great concern to a majority of people. You will be compensated in form of a higher benefit amount once you’ve reached your normal retirement age.
The amount of benefits that will be deducted from your social security benefits can be estimated through the Retirement Earnings Test Calculator offered by SSA.
Tax payments on your Social Security benefits
Whether you have to pay taxes on your Social Security benefits will depend on your MAGI, the modified adjusted gross income. If, for example, you earn a paycheck which subsequently pushes the MAGI over the prescribed threshold, a large amount of your SS benefits, up to 85 percent, will become taxable.
Paying back already received Social Security benefits and claiming them later for a higher payout
If you have retired early or opted in for receiving social security benefits at an earlier age, you will be receiving them at a lower rate. If this is the case, SSA provides you the opportunity to pay back the benefits that you have received, and restart them at a later date, ideally after you’ve reached the normal retirement age, to receive a larger amount. The highest amount of benefits you will be entitled to is when you reach the age of 70.
Do be mindful that this option is only available to you during the first year of your retirement and you can only pay back the received benefits of one year. For instance, if you took an early retirement at the age of 64, and are returning to work at the age of 65, you can repay all the benefits you received during the year without having to pay any taxes on the amount, and wait till you reach the age of 70 to opt back in for social security benefits and received a higher amount than what you were receiving 5 years ago.
It is advisable to employ the services of a CPA or tax advisor to assist you in making the required calculations and evaluations to determine whether this will be the best option for you to go for, based on your age, tax situation, and whether you are financially capable to pay back the entirety of the benefits you have received during the year. You can also refer to the SSA website for further details and information regarding the process.
Employee health insurance benefits being affected by Medicare
One of the important factors that makes people decide to stay working or return to work is the medical insurance benefits that will be provided to you by your employer. Many employers offer attractive medical insurance packages which are often a deciding factor in your choice to go with a certain employer. If you’ve reached the normal retirement age, your medical insurance will now be covered by the government under Medicare. If this is the case, you might want to talk to your employer or the HR department at your work place to find out how existing Medicare will affect your employee medical insurance and how the two will work together. Relevant information will also be available on Medicare’s website which you can go through to get a better idea of how you will be covered medically with two insurance coverage’s at the same time.
It is important to carefully compare all existing and prospective medical insurance coverage’s before you make the decision of cancelling or opting for a particular one. In most cases, the group insurance coverage offered by your employer may be more attractive than a private insurance that you may have, but in some cased, your private insurance may outshine your employer’s coverage, especially if you are receiving it under a retirement plan. If you hastily cancel an insurance now and change your mind later, it might not be possible for you to acquire the same package at the same rates, so make the decision after weighing all the options.
The effect on your pension
There’s no definitive answer to whether your pension will be affected or not. That really depends on the provider of your pension plan, or your employer and they are the ones you should reach out to, to determine if returning to work will affect your pension benefits. It’s important that you clarify this with the employer, especially if you’re starting work again with your previous employer to ensure how your pension plan is going to work along with the employee benefits plan.
Taking Required Minimum Distributions from your401(k) or IRA for going back to work
If you work over the age of 70½, the RMD rules for traditional IRAs will not be affected and they will still be required. In case of Roth IRAs, RMD requirements don’t exist.
For 401(k) employer plans, the rules differ slightly. Working over the age of 70½ and not owning over 5 percent of the business you’re employed at should make you eligible to postpone your plan’s RMDs until after you’ve retired, up to the 1st of April in the year following your retirement. Plan specific details can be provided to you by the HR department or the administrator of your plan.
Restarting contribution to your retirement accounts
If you return to work after early retirment, you should be able to start contributing to eligible retirement plans offered by your employer, regardless of your age, with eligibility to contribute to a traditional IRA as well if you’re younger than 70½.No such restrictions based on age apply to Roth IRAs but income restrictions will need to be considered.
Would returning to work require you to change your asset allocation to explain the new income?
Retired individuals who depend on the investments they’ve made for a considerable ratio of their income are recommended to allot between 20 to 60 percent of their retirement portfolio to stocks, in order to give the portfolio a good chance to last a lifetime.
The amount of portfolio to be allocated to stocks will vary from person to person based on your circumstances and the level of risk you are prepared to undertake.
Restarting work after early retirement is a personal decision that you will make considering your preferences, and financial needs. But it’s not a decision you should jump into straight away and careful consideration is advised while deciding each aspect of the process. If you’re not confident you can make the right decision due to lack of information or any other reason, contact a financial or tax advisor, or your CPA for assistance and detailed guidance.