Amid rising inflation and a volatile stock market, many retirees are returning to work. In April, Hiring Lab, the economic research arm of the job board Indeed.com, reported that as of March 2022, 3.2 percent of workers who retired a year ago are already employed.
Not withdrawing can help stabilize or increase your cash flow. But it can lead to unintended consequences in other financial areas of your life, such as Social Security Medicare, pensions, and taxes. So, before you launch your resume, here are four things to keep in mind:
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Social Security
There are two ways that working longer hours could have a positive effect on your future Social Security benefits. First, the money you earn now can increase your long-term average income in your profit calculation. Second, extra income can make it easier for you to delay claiming Social Security for a few years. This is valuable, because benefits increase by 8% per year for each year you delay applying after your full retirement age, up to age 70.
However, if you start collecting Social Security before you reach full retirement age and then go back to work, your monthly benefits could be reduced, at least temporarily.
Your check will decrease if your earnings exceed the annual earnings limit set by the Social Security Administration ($19,560 in 2022). If you do not exceed the limit, there is no impact. For every $2 you earn above the limit, your profits will be reduced by $1.
For example, if you earn $40,560 this year, your benefits will be reduced by $10,500. The year you reach full retirement age, the earnings limit is higher ($51,960 for 2022), and your benefits are reduced by only $1 for every $3 above that limit. Once you reach full retirement age, deferrals end and future monthly benefits are recalculated to make up for money previously withheld.
To be clear, the deferral only applies to income from wages and net self-employment income. It does not include pensions, government benefits or investment income. And it only affects people who have not yet reached the retirement age determined by the Social Security Administration; i.e. 66 if you were born between 1943 and 1954. The full retirement age gradually increases for those born between 1955 and 1960. For people born in 1960 or later, the full retirement age is 67 years
For more information, see the Frequently Asked Questions section of the Social Security Administration website.
Medicare
Should you keep Medicare coverage if you work for an employer that offers health insurance? The answer to this question is complicated. There are many ifs, ands, and buts to consider.
If you, or your spouse, go to work for a company that offers health insurance, you can get it and stay on Medicare at the same time. One will be considered primary coverage and the other secondary. But if you’re still on any part of Medicare, you can’t participate in a health savings plan if your employer offers one.
However, things get more complicated if you want to keep Medicare Part A (which is free for most people) but drop the parts of Medicare that you pay for, such as Medicare Part B (coverage outpatient) Part D (prescription drug plans) Medicare Advantage and Medigap.
For starters, the coverage rules are different for small businesses (fewer than 20 employees). If you’re over 65, Medicare is considered your primary coverage, and your private insurance only pays for services that Medicare doesn’t. This could leave you with significant gaps in your coverage.
Even if you work for a larger employer, which offers you cost-effective insurance, you should avoid breaking the rules governing re-enrollment, pre-existing conditions, etc. when you are ready to re-enroll in Medicare coverage. later. So, before dropping any part of your Medicare coverage, talk to a Medicare broker and your human resources department to fully understand the impacts of your decision.
Another problem: If you earn enough, you may be responsible for a surcharge on your Medicare Part B and Part D premiums. This could be substantial. In 2022, the average Part B premium is $170.10 per month, but higher earners pay up to $578.30 per month. You won’t be affected by the increase immediately, as the government uses your tax return from the previous two years to determine the cost of premiums.
To avoid unpleasant surprises in the future, visit Medicare.gov to see what, if any, co-payments you may be responsible for.
Pensions
Returning to work after retirement can affect your pension. Each plan has its own set of rules and restrictions, so be sure to check with your HR department or pension plan provider to make sure you understand any potential issues.
Some plans allow you to collect a full pension at retirement age, others suspend pension payments, and still others place limits on your earnings and hours. Most pensions are not affected if you go to work for a new company, but here again, there are some exceptions.
Taxes
Finally, a return to work could bump into a higher tax bracket, which could increase the tax bite of your investment income, required minimum distributions and other types of income. In most cases, the extra income will outweigh the tax pain, but it’s wise to do a cost-benefit analysis.
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