Against a backdrop of rising inflation and a volatile stock market, many retirees are returning to work. In April, Hiring Lab, the economics research arm of the Indeed.com job site, reported that in March 2022, 3.2% of workers who were retired a year ago are now employed.
Not retiring can help stabilize or increase your cash flow. But it could have unintended consequences in other financial areas of your life, including Social Security, retirement, and taxes. So before you post your resume, here are four things to consider:
1. Social Security
Working longer can have a positive effect on your future Social Security benefits in two ways. First, the money you earn now can increase the long-term average earnings in calculating your benefits. Second, extra income could allow you to delay your Social Security application for a few years. This is valuable, because benefits increase by 8% per year for each year you delay applying past full retirement age, until age 70.
However, if you start collecting Social Security before reaching full retirement age and then return to work, your monthly benefits could be reduced, at least temporarily.
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Your check will decrease if your income exceeds the annual income 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 over the limit, your benefits 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 only reduced by $1 for every $3 above this limit. Once you reach full retirement age, deferrals end and future monthly benefits will be recalculated to offset any amount previously withheld.
To be clear, the deferral only applies to salary income and net self-employment income. It does not include pensions, government benefits or investment income. And that only affects people who have not yet reached full retirement age as determined by the Social Security Administration; or 66 years old if you were born between 1943 and 1954. The full pension age increases gradually for people born between 1955 and 1960. For people born in 1960 or later, the full pension age is 67 years old.
For more information, see the Frequently Asked Questions section from the Social Security Administration website.
2. Health insurance
Should you keep Medicare coverage if you work for an employer that offers health insurance? The answer to this question is complicated. There are a lot of “ifs”, “ands” and “buts” to consider.
If you, or your spouse, are going to work for a company that offers health insurance, you can take it and stay on Medicare at the same time. One will be considered primary coverage and the other secondary. But if you stay on any part of Medicare, you can’t participate in a health savings plan if your employer offers one.
However, things get trickier if you want to keep Medicare Part A (which is free for most people) but give up the parts of Medicare you pay for, such as Medicare Part B (outpatient coverage) Part D (drug plans prescription) Medicare Advantage and Medigap.
For starters, the coverage rules are different for small businesses (fewer than 20 employees). If you are over 65, Medicare is considered your primary coverage and your private insurance only pays for services not covered by Medicare. This could leave you with significant gaps in your coverage.
Even if you work for a larger employer, who offers you cost-effective insurance, you will need to avoid breaking rules governing re-enrollment, pre-existing conditions, etc. when you are ready to re-enroll in Medicare coverage. later. So, before removing any part of your Medicare coverage, speak with a Medicare broker and your human resources department to fully understand the impacts of your decision.
Another problem: if you earn enough, you could be liable for a premium 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 high earners pay up to $578.30 per month. You won’t be immediately affected by the increase, since the government uses your tax return for the previous two years to determine the cost of the premiums.
To avoid unpleasant surprises along the way, visit Medicare.gov to see what extras, if any, you might owe.
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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 human resources department or pension plan provider to make sure you understand any potential issues.
Some schemes allow you to receive a full pension at retirement age, others suspend payment of the pension and still others impose limits on your earnings and hours of work. Most pensions are not affected if you go to work for a new employer, but again there are some exceptions.
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Finally, returning to work could push you into a higher tax bracket, which could increase the tax bite on your investment earnings, 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.
Nancy Collamer, MS, is a semi-retirement coach, speaker, and author of “Second-Act Careers: 50+ Ways to Profit From Your Passions during Semi-Retirement.” You can now download his free manual, “25 Ways to Help You Identify Your Ideal Second Act” from his website at MyLifestyleCareer.com (and you’ll also receive his free bimonthly newsletter).
This article is reproduced with permission from NextAvenue.org© 2022 Twin Cities Public Television, Inc. All rights reserved.
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