I often think about retirement like renovating a home. You know that, in the long run, you’re going to get exactly what you want out of it. It’s going to be perfect – and unlike anybody else’s. But during a home renovation process, you might run into some roadblocks. You and your partner might not agree on the tile for the backsplash in the kitchen. Your contractor might find an issue with the plumbing that’s going to be more expensive than you’d planned. Maybe you even find that the work takes longer than your originally projected timeline. However, despite all of the hassle and stress, the end result is completely worthwhile.
Retirement is a lot like that. While many people retire, they all do it in different ways. They customize it to align with their values and what makes them happy. With so many options available to you, it can be tough to know where to start.
One of the best (and worst) things about retirement is that it’s completely customizable. You get to make it exactly what you want. Unfortunately, that doesn’t come without planning, designing, flexibility, and patience.
Just like a home renovation, it can help to look at retirement one question (or one planning hurdle) at a time. Let’s start with a popular question:
Should I work in retirement?
The Case for Continuing to Punch In
According to the Bureau of Labor Statistics, 54% of people ages 60-64 worked at least part-time in 2017. In that same year, they found that 31.2% of people ages 65-69 were working. There are more people working in retirement than ever before – and for good reasons.
Saving for retirement can be really tough. With dwindling pension plans and lifestyle fluctuations that could hit your retirement savings budget, your personal savings might not be enough to cover your expenses right now.
Even though your cost of living will most likely decrease during retirement, it probably won’t go down as far as you think it will. You still have to pay for housing, food, utilities, and activities. Getting a part-time job could potentially help lessen the financial burden.
New retirees are 40% more likely to develop depression. This statistic, though alarming, makes a lot of sense. When you were working, you had a place to go, you made an impact through your work, and collected friends and memories along the way. Once that’s gone, it can be a tough transition.
Part-time (or even full time!) work in retirement can provide a social, or communal, element that brings more fulfillment to your days! Working when you’re retired can give you a sense of balance, community, fulfillment, and extra income.
The Clock’s Run Out
While working in retirement can have some great personal and financial benefits, there are other consequences to consider such as taxes, Social Security, and Medicare.
You’ve worked hard and saved diligently. And although you may have thought about the impact of taxes on your income during your career, you might not be thinking about how they impact your retirement income. In retirement, you’ll still owe regular income tax on the savings you’ve grown in accounts that are funded with pre-tax money (think: your 401k, or a Traditional IRA). The IRS stipulates you must take RMDs each year after you turn 70 ½ and that money will be taxed as income.
When you are in retirement, presumably you would be in a lower tax bracket which would lessen the tax bill. But if you are working, you could push yourself into a higher tax bracket, which could add a significant expense each year.
The Social Security Administration sets an income limit which designates the amount of money someone can make in a year while still receiving benefits. This income threshold applies to people who collect Social Security before full retirement age and the year of their full retirement age. For 2019, the limit is $17,640. If you collect benefits after your full retirement age, the income limit does not apply.
So how does it work?
If you were born in 1960 (or later), your full retirement age is 67. If you begin taking benefits any time between your 62nd and your 67th birthday you will have to be mindful of the income limit. Since the limit for 2019 is $17,640 if you earn more than that, the SSA will deduct $1 for every $2 you make over that mark.
This deduction changes starting the year you turn your full retirement age, so the year leading up to your 67th birthday. If you earn more than the limit, the SSA will deduct $1 for every $3 over that you earn.
Healthcare is one of the most important things to consider in retirement. If you are 65 or older you may have enrolled in Medicare. It’s important to remember that if you make more money, such as through part-time work, you may see an increase in surcharges from your Medicare plan. This charge specifically effects Medicare Part B (medical supplies) and Part D (prescriptions).
If you make more than $85,000 (single filers) or $170,000 (filing jointly) you’ll have to pay an income-based premium called the Medicare Income-related Monthly Adjustment Amount, which is broken up by the SSA into four income brackets. Your monthly premium is linked to which bracket you fall into and can fluctuate as your income does.
For people who are collecting Social Security, this increased bill will be taken directly from your monthly check, but those who are not yet enrolled will be billed directly from Medicare. This is an important point to consider to help keep your costs lower in retirement.
Ask for Help
Working in retirement can offer many wonderful benefits such as forming a new community, finding meaning in your life, and supporting additional income needs. But it does not come without a price. It is important to think about how working will affect your tax bracket, Social Security benefits, and Medicare responsibilities.
Your retirement plan is customizable, something you can design entirely for you but you don’t have to do it all alone. A financial planner will be able to help you sort through your unique situation and help devise the best plan for you. So what are you waiting for? Give us a call!