Retired and returning to work: How the extra income could collide with other financial considerations

Sometimes, older Americans discover that retirement just isn’t a good fit.

Whether due to needing more income or wanting personal fulfillment, many older Americans head back to work after calling it quits. Of workers age 65 or older, 40% had previously retired at some point, according to a report from Rand Corporation.

However, if you are among those thinking about picking up a job again, it’s worth considering how the extra income could affect other parts of your financial life.

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Of course, extra income in and of itself isn’t bad. 

“If you earn even $5,000 and it means you don’t have to take $5,000 out of your retirement savings, that’s money that can be invested,” said certified financial planner David Demming, president of Demming Financial Services in Aurora, Ohio. “It puts less stress on your asset base.”

Here’s what to know.

If you tap Social Security before your full retirement age (as defined by the government) and are still working or return to work, your wage income could reduce your benefits.

While delaying Social Security for as long as possible means a higher monthly check, many people take it as soon as they can — at age 62 — or soon thereafter.

“Anyone collecting Social Security and under full retirement age should carefully evaluate returning to work based on how much they might reduce their benefits,” said CFP Shon Anderson, president of Anderson Financial Strategies in Dayton, Ohio.

If you do start getting those monthly checks early, there’s a limit on how much you can earn from working without your benefits being affected. For 2021, that cap is $18,960.

If you earn more than that, your benefits will be reduced by $1 for every $2 you earn over that threshold.

Then, when you reach full retirement age around age 66 or 67 — the exact age depends on your birth year — the money comes back to you in the form of a higher monthly check. (And  remember, depending on your overall income, up to 85% of your Social Security benefit is subject to federal income tax.)

At that point, you also can earn as much as you want from working without it affecting your Social Security benefits.

Also, if you are one of those early takers who is working and you reach full retirement age during 2021, then $1 gets deducted from your benefits for every $3 you earn above $50,520.

While you become eligible for Medicare at age 65, it is not free.

In addition to extra income from a job potentially pushing you into a higher tax bracket, it also could trigger additional costs for Medicare.

Basically, higher earners pay a premium surcharge for Medicare Part B (outpatient coverage) and Part D (prescription drug coverage). The extra charges start at income above $88,000 for individuals and $176,000 for married couples who file joint returns. (See charts below.)

Generally speaking, the government uses your tax return from two years prior to determine whether you owe those surcharges.

“If someone went back to work making a healthy wage, they might be in for a surprise with their Medicare premiums going up about two years later,” Anderson said.

Under changes that took effect last year, age 72 is when you face required minimum distributions, up from age 70½.

Working when you reach that RMD age can make it easier to forget those required withdrawals, experts say.

If you’re employed and contributing to your company’s retirement plan, RMDs generally do not apply to that particular account until you retire.

However, you would still have to take those distributions from any traditional individual retirement account you own, as well as 401(k) plans from ex-employers. If you don’t, you’ll face a potential 50% tax penalty.

Roth IRAs do not have RMDs while the original owner remains alive.