Retired but Thinking of Going Back to Work?

Key Points

  • You may want to return to work in order to maintain your desired lifestyle after retirement.
  • We'll cover financial considerations to take into account when deciding whether to return to work, including Social Security benefits, health insurance and taxes.
  • Helpful information for retirees who need additional income or are deciding whether to go back to work.  

After you retire, you may discover that your investment portfolio alone can't fund the lifestyle you were hoping for. What do you do now? Your basic options are to spend less, find other sources of income, or both. Some people find that they can spend less without drastically curtailing the quality of their retirement lifestyle. But if you find that cutting expenses just isn’t enough—or isn’t a viable option, as you’ve already cut your spending to the bone—you might consider going back to work. This decision can affect your  Social Security benefits, health insurance, and tax situation. To help you decide whether to go back to work, here are our answers to some frequently asked questions:

What financial issues should I consider?

Going back to work may net you more income, but it also involves new expenses such as transportation, food, job attire, and possibly caregivers if you have dependents. Your new income will be subject to income and payroll taxes, and combined with your existing income may alter your tax situation. On top of that, the additional income may affect your Social Security benefits. You won’t know for sure how going back to work might affect your finances until you crunch the numbers for yourself. So we suggest that you create a budget and do some "what-if" planning. Don’t hesitate to get help from your tax or financial professional to deal with the more complex tax and retirement benefit implications.

I'm already collecting Social Security. How will going back to work affect my benefits?

The answer depends on your age. For benefit purposes, the Social Security Administration (SSA) defines the full or normal retirement age (NRA) as between 66 and 67 for people born in 1943 or later. If you haven’t yet reached your normal retirement age, earning income could reduce your Social Security benefits:

  • If you go back to work and you haven't reached your NRA, $1 in benefits will be deducted for every $2 you earn above the annual limit (which is $15,120 in 2013).
  • In the calendar year in which you reach your NRA, $1 in benefits will be deducted for every $3 you earn above a higher limit ($40,080  in 2013), but only counting earnings before the month you reach your NRA.
  • Starting the month you hit your NRA, your benefits are no longer reduced no matter how much you earn.
  • Note: Any reduction in benefits due to the earnings test is only temporary, analogous to "withholding." You will get the money back in the form of a higher benefit at full retirement age, so we don't believe most people should be concerned with cutting back on working or worry about earning too much.

You can estimate how much your annual benefits will be reduced by using the SSA's Retirement Earnings Test Calculator. For more information, see the SSA publication How Work Affects Your Benefits.

Will my Social Security benefits be taxable if I return to work?

Your Social Security benefits may be taxable, depending on your modified adjusted gross income (MAGI). As your MAGI increases above a certain threshold (from earning a paycheck, for instance), a greater percentage of your benefits is subject to income tax, to a maximum of 85%. For details, see IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits.

Can I pay back Social Security benefits I've already received and then restart them later at a higher amount?

If you previously elected to receive early Social Security benefits at a reduced rate you have the option of paying back to the government what you’ve already received so you can restart benefits at a later date to take advantage of a higher payout. (You will receive your largest benefit by delaying retirement until age 70, so it never makes sense to wait past that age.) The option to pay back Social Security is limited to one year’s worth of benefits and is only available to you in your first year of retirement.

For example, let’s say you elected to receive early benefits at age 62 and you’re now 63 and thinking of going back to work. You could stop receiving Social Security, pay back the one year's worth of benefits you received, return to work, and then wait until age 70 to restart your benefit checks at a higher level. You don’t have to pay any interest on the benefits you’ve already received and there are no fees.

Whether it makes sense to take advantage of this option depends on your tax situation, your age, your life expectancy, and whether or not you can come up with the repayment money. You might want to enlist the help of a CPA or other professional to help you crunch the numbers. For important details about repaying benefits please read the SSA publication, If You Change Your Mind.

Will eligibility for Medicare affect my potential health insurance benefits from my new employer?

Eligibility for health insurance is one of the primary reasons many people under age 65 stay in (or return) to the work force. If you’re 65 or older and already covered by Medicare, be sure to check with your employer’s human resources department about how their insurance coverage would work with your Medicare. You can also check out Medicare and Other Health Benefits: Your Guide to Who Pays First.

If you have private health insurance, carefully compare your benefits and coverage to what might be available at your new employer. Although group plans tend to be cheaper than individual policies, it might make sense to keep what you have rather than cancelling and hoping you can re-apply at a later date. This is especially true if you have retiree health insurance from a former employer.

How might my pension (defined benefit) be affected if I return to work?

The rules vary from plan to plan, so be sure to check with your pension plan provider and your new human resources department to see if returning to work will have any impact on your benefits. This is especially important if you plan to return to your former employer.

Will I need to take required minimum distributions from my IRA if I go back to work?  Do the same rules apply to a 401(k)?

Working past age 70½ does not affect the required minimum distribution (RMD) rules for traditional IRAs—RMDs are still required. However, there are no RMD requirements for Roth IRAs.

The rules for qualified employer plans, such as 401(k)s, are different. If you continue to work past age 70½, and do not own more than 5% of the business you work for, you should be able to postpone RMDs from your current employer’s plan until after you retire—to no later than April 1st of the year after retirement. Check with your plan administrator.

For important details about RMDs please see the IRS topic Retirement Plans FAQs Regarding Required Minimum Distributions.

If it turns out I end up making more than I actually need, can I start contributing again to my retirement accounts?

As long as you have earned income and are under age 70½ you can contribute to a traditional IRA. Whether the contribution is tax deductible depends on your income if you’re also an active participant in an employer-provided plan. There are no age restrictions for Roth IRAs.

Finally, you should be able to contribute to your employer’s qualified retirement plan regardless of your age as long as you’re still working there, but check with your plan administrator to be sure.

If I go back to work, should I change my asset allocation to account for my newfound income?

To build a retirement portfolio that has the best chance of lasting as long as you do, we recommend that retirees who rely on their investments for a significant portion of spendable income allocate at least 20% (conservative), but no more than 60% (moderate) of their portfolios to stocks.

Regardless of whether the stock market rises or declines over time, our guidance remains unchanged: How much you continue to allocate toward stocks depends on your personal circumstances and on how much risk you are willing to take. If you're a Schwab client, you can get started by reviewing your investment portfolio with Schwab’s Portfolio Checkup tool. (Log into your account and click on Tools under the Guidance tab.) You can also use the Retirement Planning Calculator for a reality check on sustainable portfolio withdrawals.

Bottom line on returning to work after retirement

If you are thinking about going back to work, only you can decide whether it’s worthwhile, considering both financial and other factors. Whatever your circumstances, take into account all sources of income and the tax status of your various retirement and regular brokerage accounts as you seek to write your own retirement check. As always, contact your CPA or other trusted financial professional if you need help crunching the numbers.


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