Traditionally, retirement means leaving the workforce to pursue decades of relaxation. However, today’s retirees and pre-retirees are reshaping what it means to leave the workforce. Retirement may be an opportunity to pursue a small business, start consulting or land a side job that explores your passions. If your next phase includes earning an income, there are some financial considerations to keep in mind:
Social Security could be reduced
If you haven’t yet reached full retirement age (65 or older) and already collect benefits, the wages you earn through continued work could result in reduced Social Security payments. In 2017, an individual earning more than $16,920 who hasn’t reached full retirement age will see a $1 reduction in Social Security benefits for every $2 earned above that level. The earnings limit is higher in the year you reach full retirement age, and no longer applies after you reach full retirement age. If you haven’t already claimed Social Security, you may wish to delay your benefits to earn a higher amount later in life.
Prepare for higher taxes
If you are taking income from retirement accounts or generating earnings from your savings or investments, at least some of that money is subject to tax. Earning income from work may move you into a higher marginal tax bracket, meaning those distributions and investment earnings could be taxed at a higher rate. Be prepared for a potential bump in your tax bill.
Keep saving money
Ongoing work may allow you to preserve your retirement savings for later in life and even continue to build those savings. As long as you have earned income, you can put money away in tax-advantaged retirement plans. This includes an employer-sponsored plan, if it is available to you, a traditional IRA, or a Roth IRA. Contributions to traditional IRAs can only continue up to the year in which you turn 70-1/2. If you earn income past that point, you may be able to continue making contributions to a Roth IRA indefinitely, based on your income level.
Pay attention to health insurance
Even if you retain health care coverage from an employer, you should consider signing up for Medicare Part A at age 65. There is generally no cost, and it provides coverage for care in hospitals and other institutions. Talk to your employer about whether you should sign up for Medicare Part B (a monthly premium applies). You may be able to delay doing so if you are covered by your employer’s plan without being subject to a 10 percent annual penalty for delaying enrollment in Part B. Check the rules carefully before you turn 65.
Whatever your motivation for continuing to earn a paycheck, the income you earn could impact several aspects of your financial life. Evaluating and planning for the effects working will have on your finances may help you feel more confident about living decades in retirement.
Michael W. K. Yee, CFP®, CFS®, CLTC, CRPC ®, is a Financial Advisor, Certified Financial Planner ™ practitioner with Ameriprise Financial Services, Inc.
Ameriprise Financial, Inc. and its affiliates do not offer tax or legal advice. Consumers should consult with their tax advisor or attorney regarding their specific situation. Investment advisory products and services are made available through Ameriprise Financial Services, Inc., a registered investment adviser.
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