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Working in Retirement: How Does It Affect Social Security and Medicare?

Are you retired but considering going back to work?

Whether you’re in it for the extra income, or merely getting paid for something you enjoy doing anyway, it’s important to understand how bringing home a paycheck in retirement could affect your Social Security benefits and medical insurance coverage. (For more on how a post-retirement paycheck might fit in with your savings, read Working in Retirement: How Does it Affect Your Savings and RMDs?.)

Here are a few things to consider before punching that timecard.

Your Social Security benefits could be reduced—temporarily

Your age matters here, as we’ll see below, but any reductions that do occur are temporary. The IRS will eventually recalculate your benefit and give you credit for months where you didn’t receive a benefit. So, don’t let a temporary reduction in payments keep you from returning to work. (For more information, refer to “How we deduct earnings from benefits,” at www.ssa.gov.) Here’s how the age rules work:

If you haven’t yet reached your full retirement age (FRA)—between 66 and 67 for people born in 1943 or later—working could mean temporarily giving up $1 in benefits for every $2 you earn above the annual limit ($18,960 in 2021).

Here’s an example of how that might look:

EXAMPLE 1: You retire early and go back to work before reaching your FRA. Your annual salary is $30,000. Because you are $11,040 over the annual limit, your Social Security benefits are reduced by $5,520.

If you go back to work during the year you reach FRA, $1 in benefits will be deducted for every $3 you earn above a higher limit ($50,520 in 2021), but only counting earnings before the month you reach your FRA.

EXAMPLE 2: You work all year and reach your full retirement age in June. From January 1 to May 31 you earned $15,000. Because your earnings are under the limit, your Social Security benefits for the year are unaffected.
EXAMPLE 3: You work all year and reach your full retirement age in June. From January 1 to May 31 you earn $51,920. At this point you have earned $1,400 over the annual limit, which reduces your Social Security benefits for the year by $466.

Starting the month you hit your full retirement age, your benefits are no longer reduced no matter how much you earn.

Remember, as long as you’re working, you (and your employer, if applicable) will need to pay the Social Security Federal Insurance Contributions Act (FICA) tax. Because Social Security benefits are based on your highest 35 years of income, the additional earnings may boost your Social Security benefits by replacing or filling in years where you had little or no earnings.

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.” 

Your Social Security benefits could be taxable

Your modified adjusted gross income (MAGI) matters here. As your MAGI increases above a certain threshold (from earning a paycheck, for instance, or certain other income sources), 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,” or consult with a tax advisor.

You can pay back benefits you’ve already received—and boost your future benefit

If you’ve taken Social Security benefits early at a reduced rate, you have the option of paying back to the government what you’ve already received and restarting benefits at a later date with a higher payout. (You receive your largest monthly benefit by delaying retirement until age 70, but not beyond, so it never makes sense to wait past that age.) Keep in mind that you will need to repay the gross amount of your benefit—which includes any withholdings for Medicare premiums and/or income tax.

For example, say you chose to receive benefits at 62 and nine months later decided you wanted to return to work. You could stop receiving Social Security by withdrawing your application for benefits, pay back the benefits received, return to work, and then defer your benefit up to age 70, when you could restart your benefits at a higher level. The option to pay back Social Security is limited to the first 11 months’ worth of benefits, and the SSA allows repayment only in the first year after you start to receive benefits.  

You may need to do some planning with any employer health insurance

Eligibility for employer-offered group 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, check with your employer’s human resources department about how their insurance coverage would work with your Medicare. In short, Medicare could help pick up the tab for expenses not covered by your group plan, but the rules vary depending on how many employees your employer has. For more information, read Medicare and Other Health Benefits: Your Guide to Who Pays First.”

If you have private health insurance, compare your benefits and coverage with plans offered by a new employer. Although group plans tend to be less expensive than individual policies, you could be better off keeping your individual policy rather than canceling it and hoping you can get your old coverage and rates back later.

Make sure you enroll on time, and be careful with your HSA

Both Medicare and Medigap have specific enrollment periods. You may be able to enroll after age 65 without penalties if, for a period after you reach age 65, you receive employer coverage. Pay close attention to Medicare enrollment periods if you have retiree health insurance from a former employer or are under COBRA. These types of coverage do not allow you to defer enrollment past age 65 without penalties and may leave gaps in your coverage.

Also note that once you are enrolled in Medicare, you’re not permitted to make contributions to a Health Savings Account (HSA). If you enroll in Medicare after reaching age 65, Medicare will backdate your enrollment by six months (but no earlier than age 65). To avoid an IRS penalty, make sure you stop contributions to the HSA in time. 

The bottom line

Returning to work after retirement is ultimately a personal decision. If it supports your goals and financial needs, then go for it. With a little planning, your new job can complement your Social Security and health insurance arrangements. As always, contact your financial advisor or other trusted financial professional if you have questions.

What You Can Do Next

Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Investing involves risk, including loss of principal.

This information is not intended to be a substitute for specific individualized tax, legal or investmentplanning advice. Where specific advice is necessary or appropriate, Schwab recommends consulting with a qualified tax advisor, CPA, financial planner or investment manager.

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