Should you keep on working in retirement? Just because you’re eligible to retire, should you? It’s a challenging question for many mature adults, and one that financial advisors hear often. Many people choose to work into their retirement years because they love what they do—or because they need (or perceive the need) for continued income.
Some are financially comfortable but want to delay the date when they begin making withdrawals from their retirement accounts or taking Social Security checks, so as to preserve or maximize future payments from these income sources.
The notion of retirement—voluntarily leaving the workforce around age 65 to live off of saved assets—has only been around since the late 19th century. Most Americans expect to retire at 66, according to data from the American Association of Retired Persons.
But as Americans’ longevity has increased, and the cost of healthcare and long-term care has thus done the same, many adults think of the retired years as a kind of “Second Act” where they may continue working as before.
Here are some questions you may wish to discuss with a planner if you plan to change your career or continue to work in your field during retirement.
How are you defining retirement?
Retirement is a loose term these days. From an age perspective, you can tap funds available to retirees at specific ages—for instance, Social Security is available beginning at age 62, while by 70.5 you are legally required to begin withdrawing a certain percentage of the balance (a “required minimum distribution”) from certain retirement accounts.
From a financial perspective, you might be retired once you begin withdrawing from these accounts—although from an emotional perspective, perhaps you “retire” when you step away from a corporate career and take a different type of work that nonetheless continues to pay you.
If you’ve been with an employer for a long time and are planning to retire, it’s important to review your company’s employer-sponsored retirement plans, pensions, and any healthcare you may take with you in the event of a layoff, buyout, or retirement, notes Rita Cheng, a certified financial planner with Blue Ocean Global Wealth in Maryland. It’s also important to review beneficiaries (spouses, adult children) who may be named on these policies.
How you define “retirement” and how your employer does may differ. Some employers consider a worker “retired” if his or her tenure at the company plus their age add up to a certain number, meaning a worker who worked a few decades starting in their 20s at a company could be considered “retired” for departure purposes in their early 50s—and that can impact how corporate benefits walk out the door with that person.
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Why are you working – fulfillment, income, benefits?
Many retirement-eligible adults continue working in order to tap workplace benefits, particularly health benefits which can be expensive during a “gap” between the end of a full-time career and the onset of Medicare or other retirement-specific healthcare options.
Cheng says that many of her clients, however, don’t need full-time income but would like to continue working because they enjoy their profession or the mental stimulation of holding down a career. One, she says, was forced to retire from a government job consulting with small businesses but found employment at one of those businesses.
“She could’ve retired with her current assets, but things might’ve been a bit tight,” Cheng says. “In her new job, she works a roughly 30-hour week, 3-4 days only, so she always has long weekends for travel, her social life, and the activities she likes to do for fun.”
The client also has health care benefits, which are as important to her as the income.
Consider the tax and Social Security withdrawal impacts of working in retirement
Many retirement-age adults make mistakes with managing their money. Those who are working on preserving capital by continuing to earn an income and opting against withdrawing from retirement accounts may find that their plan will backfire later. Especially if waiting means that when they begin taking required minimum distributions from these accounts the larger distributions they’ll receive for having waited to take them put them into a higher tax bracket, Cheng notes.
It’s important to do a tax analysis of the consequences withdrawing from retirement accounts for this reason. Just because you’re withdrawing from retirement doesn’t mean you have to spend that money if you don’t need to—but you can withdraw it to prevent future tax challenges.
If you’re taking Social Security withdrawals prior to what Social Security considers your “Normal Retirement Age” and are also earning income, you may find that your Social Security checks aren’t as large as you expected because of the Social Security Administration’s “earnings test.”, which lowers your Social Security check amounts if your earnings exceed certain thresholds.
Once you reach normal retirement age the reduction in Social Security check amounts is mitigated. Depending on how your retirement-age income and Social Security payments interact, you may want to analyze when to begin withdrawing and how much to work as you near retirement, Cheng notes.
“In some ways it’s easier for people to save money while they’re in their working years than to withdraw it and live on it in retirement,” she says.
For those considering an “early retirement” from a driven career and making partial retirement withdrawals to support a lower paying job, workers over 55 can begin taking retirement withdrawals without penalty via a program known as “substantially equal periodic payments” (SEPP). They must take these payments at the same level until age 59.5, but can always reinvest them if the withdrawals aren’t ultimately needed.
Many adults who work in retirement choose to do so because they have skills they’d like to continue using and sharing, based off a lifetime of experience. Whether this means teaching, consulting, or part-time work in what was once a full-time field, the ramifications for personal finances can be significant without stopping to look at their impact on a financial plan.
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