Retirement is not a destination; it's a journey—sometimes a lengthy and adventurous journey. Retirees could find this out the hard way if dividends from their investment portfolios and Social Security no longer meet their income needs.
So what do you do when faced with financial challenges in retirement? You can either cut your expenses or increase your income. More retirees are choosing the latter, increasing their incomes by going back to work after retirement. Some call this the second act, but another nickname is the revolving door retirement.
Pushing through the revolving door from retirement back to work is not quite as simple as it sounds. If you are driven to work doing something you love, then go for it. However, if you are deciding whether a revolving door retirement makes sense for you, be aware, there may be tax and Social Security consequences, as well as increased spending on your part. Here's what you should consider before going back to work in retirement.
If you have been out of the working world for a few years, you may not recall how much you used to spend getting dressed for the office, commuting there and back, and eating and drinking while there. Expenses for things like clothing, commuting, and meals eaten out of the house can add up quickly, so be sure to weigh them against your potential income. Or consider finding a work-at-home or close-to-home job where these factors are not relevant or will not significantly cut into the income you earn.
If animals or other people have come to rely on your daily care, you may also have to pay for a surrogate, such as a dog walker or day nurse.
Income Tax Considerations
The other side effect of increasing your income is potentially bumping yourself into a higher income tax rate. Remember, one of the benefits of taking distributions from a 401(k) or IRA in retirement is that you are likely in a lower tax bracket and therefore paying less tax. Earning income in your retirement years can impact your tax rate and how much you pay for retirement account distributions.
Social Security Considerations
The Social Security questions get a little tricky, depending on your age and whether you are already collecting benefits. If you are collecting Social Security but have not reached the full retirement age (65 to 67 depending on year of birth), going back to work will cost you. For every $2 you earn over the annual limit in a year prior to reaching your full retirement age, you lose $1 in benefits. That income limit is $18,240 for 2020 and $18,960 for 2021.
During the year in which you will reach the full retirement age, $1 in benefits for every $3 you earn is taxed away on earnings over $48,600 for 2020 and over $50,520 for 2021. That income limit applies until the month in which you reach full retirement age. Starting in that month, you can earn as much as you want without your Social Security benefits being cut.
If you started receiving Social Security early and go back to work within a year, you can stop receiving benefits, pay back the benefits you've already gotten, and regain the opportunity to get full benefits later on.
If you are covered by Medicare, you should consider whether a new employer's insurance benefits will change your coverage. When individuals age 65 or older are covered by group health insurance because they are working or a spouse is working, the group plan typically pays first, before Medicare benefits kick in. It can depend on the size of the company you work for.
Retirement Savings Considerations
Of course, if you are still earning income, you have the opportunity to put a portion aside in a retirement account, such as an IRA or 401(k). When the revolving door stops at full retirement, you should have a little more savings waiting there for you.