One in six retirees is now considering rejoining the workforce. For many people, this decision is a financial one. Some retirees are finding they need to bolster their retirement income to keep pace with inflation and rising costs, whereas others just want a little extra spending money for travel and leisure activities. Some find they miss the sense of purpose and fulfillment work gave them. They realize that being in the workplace is a great way to stay socially engaged and active.
Regardless of the reason, there could be consequences to your Social Security benefits, taxes, and, in some cases, health insurance if you return to work. Although there are many positive aspects of returning to work, it’s important to be aware of the pros and cons to avoid surprises.
Returning to Work
Returning to the workplace can feel a little daunting but also exciting. What type of work do you want to do? How many hours do you want to work? Now might be the time to explore a second career that wasn’t practical earlier in life. You might have a hobby or passion that could lead to a job. Imagine doing something you love and getting paid for it! Someone who loves gardening might consider a job at a garden center. A golf enthusiast might like to work at a golf course or sporting goods store. A book lover might enjoy working at a bookstore. Alternatively, you may have industry-specific experience that might suit a job as a consultant. Consider all the options available to you. Don’t forget: unless you are working remotely, you will have expenses for transportation, work attire, and meals.
Impacts to Social Security Benefits
Social Security can be complicated and vary depending on your situation. If you aren’t yet collecting Social Security benefits, working after retirement might help you to delay collecting benefits until you are older. The longer you can delay, the larger your monthly benefit will be.
Income rules determine how much extra money you can earn each year without impacting your benefits if you are already receiving Social Security benefits and are not yet full retirement age,. In 2023, if you make more than $21,240 and are not yet full retirement age, Social Security will deduct $1 for every $2 you earn over the cap. The year you reach full retirement age, Social Security will deduct $1 for every $3 you earn over $56,520 during the months before you reach full retirement age. As the limits are adjusted annually, it’s important to check how they have changed at the beginning of each year. The earnings limit does not include income from government or military benefits, investment earnings, interest, pensions, annuities, or capital gains.
Once you reach your full retirement age, you can work and earn as much as you want with no impact on your benefits. Social Security will repay any money it deducted from your benefits in earlier years because you earned too much.
How Social Security Calculates Your Earnings
How work affects your benefits depends on your situation. If you receive wages, income limits are based on your gross pay. If you are self-employed, Social Security counts your net income only and looks at the amount of time you spend working to determine if you are still considered retired. If you retire mid-year, Social Security has a special earnings limit rule for this first-year situation. You can use Social Security’s retirement earnings test calculator to see what effect your new earnings may have on your benefits.
Social Security uses the average of your 35 highest-earning years to calculate your benefits. If you return to work and continue to pay Social Security taxes, your additional income could increase your monthly benefit. For this reason, you need to make the Social Security Administration aware of any change in your income.
Canceling or Suspending Social Security Benefits
If you decide to go back to work, you might want to rethink whether you need to collect your Social Security benefits. If you haven’t reached full retirement age and you change your mind within 12 months of signing up for Social Security, you can cancel your Social Security benefits. To do this, you will need to repay all the money you received. You can then apply for Social Security payments again at a later date, at which point your monthly benefit will be larger due to your increased age. You can only withdraw your Social Security application once in your lifetime.
If you have been collecting your benefit for more than a year, you still have the opportunity to suspend your retirement benefits once you reach full retirement age. Your benefit will continue to grow each month it is suspended. You can restart your benefit any month you choose or wait until age 70 when it will automatically restart.
Social Security will notify you in writing of any changes to your benefits and if they need to speak with you. They will only call you if you contact them first. They will only text you if you opt to receive notifications that way and to verify your identity when you access your online account. Be vigilant and protect yourself from Social Security scams.
Tax Implications
The extra income you earn by returning to work could bump you into a higher tax bracket, meaning you will pay higher income taxes. If your combined income hits a certain threshold, up to 85% of your Social Security benefits could be taxable.
Health Insurance
If you are returning to work, you might have the option to pick up employer-sponsored health insurance. If you aren’t yet 65, this might give you an opportunity to pay less for your health insurance coverage, since employers often offer better coverage with fewer out-of-pocket expenses.
If you are over 65 and have enrolled in Medicare, your situation is a little more complicated. If you return to work for a large employer group of 20 or more employees, you might have the option to drop your Medicare coverage in favor of the employee plan and re-enroll in Medicare down the road. As there are special rules and enrollment deadlines if you go this route, make sure you understand how it works.
If you have already begun taking Social Security retirement benefits, you cannot cancel Part A without paying back all the benefits you have received so far. However, you can drop Part B and pick it up again later. If you stop Part B and have a Medigap policy, you have to drop that as well. You will receive a new six-month enrollment window to buy a Medigap policy without having to go through medical underwriting. You also need to confirm with your employer that your Part D prescription coverage is considered creditable coverage. It’s a good idea to speak with your new employer and with Medicare before making any changes to your health insurance coverage.
If your employer has fewer than 20 employees, you’ll need to keep Medicare because it will be considered your primary insurance. You still might be able to pick up your employer’s insurance, but you should do a cost and benefit comparison to see if this would be worthwhile.
Since the premiums you pay for Medicare Parts B and D are based on your income, you should be aware your additional income could increase your premiums. Higher income beneficiaries pay more.
Consider Consulting with a Professional
Depending on your situation, even working a part-time job for a few hours a week could have an unexpected impact. To fully understand how returning to work will affect you, consult with a tax advisor and a retirement/financial planner. Once you have all the information, you can make an informed decision about whether returning to work is right for you.
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