There are pros and cons to working during retirement, even if you are just working part time. You’ll need to know how the additional income impacts your Social Security and retirement account distributions.
Not everyone’s idea of a blissful retirement includes a life of full-time hobbies. For those who want or need to keep working, a recent article in Kiplinger, “Working Part-Time in Retirement Can Be Tricky,” explains that working part-time can be good for you and your retirement. Continuing employee benefits, staying engaged in work that is fulfilling and drawing down less of your retirement savings can be a rewarding and profitable way to go.
Working part-time during retirement is very healthy from a financial-planning standpoint. Every year you work improves your earnings history, increasing the amount of Social Security you get. It can also let you to delay taking Social Security benefits, which increase by 8% every year past your full retirement age, up to age 70. Your pay from a part-time job may also mean you can wait to spend from your retirement accounts, giving them more time to grow. Finally, part-time work may let you keep employer benefits like health insurance and contributions to tax-efficient employer sponsored plans such as 401(k)s.
As an added bonus, any funds in your current employer’s plan will avoid required minimum distributions (RMDs) at age 70½ and later—provided you stay actively employed. While funds in an inactive 401(k) from a former employer would be subject to RMDs, this can be avoided if the inactive accounts are consolidated with your current employer’s 401(k) account and if your employer accepts rollovers.
Now the bad news. Working part-time in retirement can complicate your finances. If you’re already taking Social Security, your benefits are taxable based on other income sources like your pay, dividends, capital gains, retirement account distributions, and 50% of your Social Security benefits. Your part-time job means more income, but it may adversely affect your Social Security benefit.
Your part-time income may also put you in a higher tax bracket for income taxes, as well as for capital gains taxes. If your part-time income puts you at or above the 25% income tax bracket, you may be subject to a 15% or 20% capital gains tax rate.
Before you commit to the concept of part time work during retirement—or take a job—give some thought to how this will impact your finances, taxes and the type of lifestyle you want in retirement. It may be something you do for a few years as you adjust to being retired, or a longer part of your overall retirement plan.
Reference: Kiplinger (August 2017) “Working Part-Time in Retirement Can Be Tricky.”