Working in Retirement: Pros, Cons and the Effect on Your Savings and RMDs

Working during retirement has become more common.  A study conducted by United Income found that the number of “retirement-age” Americans has doubled since 1985, and that 20% of people aged 65 and older are either working or looking for work.

Many older Americans are choosing to work in retirement for a variety of reasons.  People who enjoy their work may want to continue with it, while others continue working to stay engaged and busy.  Maintaining their social connections and/or physical activity of work can produce the feeling of “slowing” the aging process, especially cognitively.  Some other people may see retirement as an opportunity to try a completely different field of work. 

For retirees with insufficient savings, continuing to work is not a choice, but a necessity.  However, higher-income families with more savings might continue to work to allow them to delay touching their retirement savings and/or Social Security. Delaying taking Social Security benefits until age 70 can maximize benefits when you start to draw on them, under current law.

Pros of Working in Retirement

Investment Portfolio Preservation – Collecting an income during retirement can delay having to withdraw money from your from retirement savings.  Even a job that pays far less than your pre-retirement career can help extend the length of time your retirement savings last.

The concept of portfolio preservation can be seen in the following example:  Assume you are making $20,000 annually from a part-time job.  It takes a $500,000 nest egg to generate $20,000 (using the common rule-of-thumb of a 4% distribution rate).  It is usually easier to find a post-retirement job earning $20,000 a year than it is to put together an additional $500,000 in retirement savings.

Continued Growth of Retirement Assets — If you have retirement savings, the delay of withdrawing funds can preserve your savings and allow for larger withdrawals in the future.

Delay Taking Social Security Payments — U.S. Social Security benefits are affected by the amount of time you hold off on collecting benefits.  Many people will want to maximize their Social Security benefit by waiting until age 70 to begin collecting the benefits. 

Assume that at age 62 you are entitled to collect $3,000 monthly from Social Security (SS) at your full retirement age (67). If you start accepting payments at age 62, you would only receive 70% of that amount or $2,100 per month.

However, if you work even part-time to replace these benefits and work until age 70 to begin accepting SS benefits, you will receive $3,720 a month for the remainder of your life.  This amount is 77% higher than the $2,100 you would be entitled to at age 62, and 24% above the $3,000 you would have received if you took benefits at age 67.

Continued Contributions to Tax-Advantaged Retirement Accounts — Under current law, you can contribute to your employer’s qualified retirement plan regardless of your age. If you meet relevant income limits, you could also contribute to a traditional IRA or ROTH IRA with your earnings.

Cons of Working in Retirement

Income Tax Effects of Working in Retirement — Post-retirement income can lead to several important financial questions.  If you earn income after you have filed for federal government benefits you will likely have to pay income taxes and may also trigger a temporary reduction in benefits paid.  For instance, if you reach “full retirement age” in 2021, the SS Administration will deduct $1 from your benefits for each $3 you earn above $50,520 until you reach full retirement age.  If you have retirement benefits that are withheld because of retirement earnings, at your full retirement age the monthly payment would be higher to consider those months in which benefits were withheld.

Required Minimum Distributions (RMDs) — Even if you work past the age of 72, you typically still have to take RMDs from your IRA.  That being said, you may qualify for an exception from taking RMDs from your then-current employer-sponsored retirement account.  To get this exemption, you must still be working and not own more than 5% of the company where you are employed.  If qualified, you can delay taking RMDs until April 1st of the year after you retire.  These exemptions do not apply to IRAs, and working in retirement does not affect RMDs from IRAs.

The IRS treats RMDs as ordinary income for tax purposes. Therefore, withdrawals will count towards your total income, potentially increasing your tax bracket, which could increase taxes on your Social Security and Medicare benefits.

If you want to decrease your tax burden, you could consider making a qualified charitable distribution (QCD).  Making a QCD would exclude the amount you donate from your taxable income dollar for dollar.

For the most part, working in retirement has a lot of advantages.  It can help to earn additional money to cover your monthly expenses and keep you active and involved.  However, it is important to be aware of the few small adjustments you may need to make to maximize your retirement plans.  You can always consult with your financial advisor to review your specific situation.

Insight Wealth Strategies, LLC is a Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where Insight Wealth Strategies, LLC and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Insight Wealth Strategies, LLC unless a client service agreement is in place.

Insight Wealth Strategies, LLC (IWS) and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.