How returning to work after retirement will affect your financial life
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It is not uncommon to want to return to work after you retire.
Whether for financial reasons or for personal fulfillment, many older Americans find that retirement doesn’t work for them. Before you take the plunge, however, consider how that extra income could affect other areas of your financial life.
According to a 2019 report by Rand Corporation, 40% of workers aged 65 or older had retired at some point. According to the latest data from the Bureau of Labor Statistics, around 10 million workers are in the 65-year-old age group, or 17.9% of that age group.
Of course, extra income isn’t bad in and of itself.
“If you make even $ 5,000, and that means you don’t have to take $ 5,000 out of your retirement savings, the money can be invested,” said certified financial planner David Demming, president of Demming Financial Services in Aurora, Ohio . “It puts less of a strain on your asset base.”
However, depending on your situation, the extra income could have a negative impact on your financial health.
Here’s what you should know.
If you take out Social Security before your full retirement age (as determined by the government) and you continue to work or return to work, your wage income could reduce your benefits.
While postponing Social Security for such a long time means a bigger monthly check, many people take them as soon as possible – around the age of 62 – or shortly after.
“Anyone who is on social security and has not yet reached full retirement age should weigh their return to work carefully by how much they could reduce their benefits,” said CFP Shon Anderson, president of Anderson Financial Strategies in Dayton, Ohio.
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If you get these monthly checks early on, there is a limit to how much you can make from the job without affecting your performance. For 2021, that limit is $ 18,960.
As you earn more, your benefits will be reduced by $ 1 for every $ 2 you earn above this threshold.
When you reach full retirement age at around 66 or 67 years of age – the exact age depends on your year of birth – the money will be returned to you in the form of a higher monthly check. (And remember, depending on your total income, up to 85% of your social security benefits are subject to federal income tax.)
At this point, you can also earn as much as you want without affecting your social security benefits.
Even if you’re one of those early adopters who are working and reaching full retirement age in 2021, $ 1 for every $ 3 you earn above will be deducted from your benefits $ 50,520.
While you are eligible for Medicare at age 65, it is not free.
In addition to additional income from a job that may push you into a higher tax bracket, it can also add additional Medicare costs.
In principle, high earners pay a premium surcharge for Medicare Part B (outpatient services) and Part D (prescription services). The additional fees start for incomes over $ 88,000 for individuals and $ 176,000 for married couples filing joint statements. (See diagrams below.)
Generally, the government uses your two year tax return to determine if you owe these surcharges.
“When someone goes back to work on a healthy wage, they may be surprised to find their Medicare premiums go up about two years later,” said Anderson.
Don’t overlook RMDs
According to the changes that went into effect last year, the age of 72 will apply from the age of 70½ when faced with the minimum payout required.
When you reach that RMD age, it’s easier for you to forget about those required withdrawals, experts say.
Generally, if you are employed and making contributions to your company’s retirement plan, RMDs will not apply to that particular account until you retire.
However, you would still have to take these distributions from every traditional individual retirement account you have. If you fail to do this, expect a possible 50% tax penalty.
Roth IRAs do not have RMDs as long as the original owner remains alive.