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Working After Retirement: 3 Financial Considerations

Retirement Planning
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an elderly woman sitting in a kitchen in front of a laptop smiling and working after retirement

You've finally retired after a long and dedicated career, but you may find yourself missing work more than you expected. Perhaps you'd like some extra income to help make ends meet, or you're feeling bored and would like to go back to work to stay busy.

But before you return to employment, it could be helpful to mull over how doing so could affect your financial situation. Here are three things to keep in mind as you think about working after retirement.

1. A Potential Increase in Expenses

While you will be earning income, there may be new costs introduced by going back to work. For instance, if you plan to work in an office, you might need to spend money on commuting and a wardrobe for work. Plus, you might not have as much time to tend to the upkeep of your home, and may have to hire outside help for tasks like cleaning or gardening.

If you plan to work as an independent consultant or other remote job, you may need to invest in some of your own equipment and supplies, pay to attend professional conferences and budget for other expenses associated with running your own business.

Before you return to work, think about how much you expect to earn versus the associated costs of that job to help determine if it's the right move.

2. Tax Implications

Working in retirement could also affect your taxes. There's a chance you may no longer be eligible for the tax credit for the elderly or disabled. This credit is available for those 65 and over and is anywhere from $3,750 to $7,500. To qualify, your adjusted gross income (AGI) can't be equal to or higher than a certain dollar amount. This ranges from $12,500 to $25,000 and depends on your tax filing status.

Keep in mind that even if you're working part-time and your AGI is under the limits to qualify for the credit, you still might not be able to receive the tax credit. That's because you may not be eligible for the credit if your nontaxable Social Security benefits, annuities, pension and disability income is higher than a certain dollar amount. Once again, the limits depend on your tax filing status and can range from $3,750 to $7,500.

Also, if you have additional income, you may have to pay taxes on your Social Security benefits. How much you pay will depend on your income and benefit amount, and working more and generating a higher income could bump up the amount you have to pay in taxes. If you file your tax return as an individual and your income is between $25,000 and $34,000, you may have to pay income tax on up to 50% of your benefits. If your income is more than $34,000, you may have to pay taxes on up to 85% of your benefits.

If you file a joint return and your income is between $32,000 and $44,000, you may have to pay income tax on up to 50% of your benefits, and if the income on your joint return is more than $44,000, you may have to pay taxes on up to 85% of your benefits. (You can refer to the IRS's Publication 915 for more details.)

3. Impacts on Social Security

When deciding whether to start working again in retirement, you may want to consider how it could affect your Social Security benefits. You can still collect Social Security while working, but if you haven't reached the full retirement age, you may not get your full benefit. Full retirement age is 66 for those who were born between 1943 and 1954. After that point, it increases by two months for each birth year (for example, it's 66 and two months for those born in 1955, 66 and four months for those born in 1956, etc.) until leveling out at 67 for anyone born in 1960 or later.

If you have yet to reach your full retirement age, you may want to check the exempt amounts under the Social Security Administration's retirement earnings test. The earnings test only applies to those who have yet to hit the full retirement age. In 2019, you'll lose $1 of your Social Security benefit for every $2 you make over $17,640.

What about the calendar year when you're due to reach the full retirement age? According to the Social Security Administration, if you earn more than $42,920 during that year, Social Security will deduct $1 for every $3 you earn. Note that earnings are counted only in the months before you reach your full retirement age. Once you hit your full retirement age, you can earn as much as you like without your benefits being reduced. However, you should be informed on the tax implications you could face, which are mentioned above.

Working after retirement can offer a number of perks: an income boost, career fulfillment and the potential to learn new skills and expand your social circle. However, before you return to work, you'll likely want to figure out how doing so impacts your finances. With a little forethought, you can help create a retirement that's both financially secure and emotionally satisfying.

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