Retirement is often viewed as the gateway to a life of leisure. However, with an average age of 61, many retirees are choosing to embrace post-retirement employment. If you continue to work after retirement, you must know how this decision may affect your benefits, like Social Security and Medicare. If you’re considering post-retirement employment, keep reading to learn how your benefits may change!
Why work during retirement?
In the modern age, retirement no longer means a complete departure from the workforce. Instead, many individuals continue working in a more limited capacity through retirement. This decision is often motivated by financial needs, a desire for continued engagement, or to pursue unexplored passions. The rising cost of living or unexpected expenses often prompts individuals of retirement age to continue working. To see if you need to continue working after retirement, use the Social Security Administration’s retirement earnings calculator. Additionally, some individuals will continue working to stay active and engage with others socially. This can help keep them mentally sharp while providing an additional financial cushion. Finally, some retirees explore a secondary career or passion they could not do during their normal working years. Regardless of the reason, post-retirement work can affect the types and amounts of retirement benefits you receive.
Types of Retirement Benefits
Working after retirement can significantly impact what kinds of benefits retirees can receive.
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Social Security
This is a federally administered program that provides financial support to eligible retirees. Benefit amounts are determined by an individual’s highest 35 years of earnings. Social Security benefits can be received as early as 62 years old. Suppose you begin collecting Social Security benefits before reaching your FRA (which is between 66 and 67, depending on your birth year). In that case, your benefits may be reduced if you earn over a certain limit.
In 2024, the annual limit set by the Social Security Administration is $22,320. If you exceed this limit, $1 is deducted from your benefits for every $2 earned above the threshold. However, these reductions are not permanent. Your benefits will be recalculated at your FRA, and you may receive credit for the months your benefits were reduced.
Once you reach FRA, you can earn as much as you like without reducing your Social Security benefits. Additionally, your benefits may be recalculated if your earnings during retirement are higher than your previous highest-earning years.
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Employer-Sponsored Pensions
Pension plans are retirement savings plans offered by employers where employees contribute a certain amount over their working years, and employers also contribute. Upon retirement, a certain amount of this money is paid out. For defined benefit pension plans, your pension amount is typically fixed based on your salary and years of service. In most cases, working after retirement won’t affect your pension unless you return to work for the same employer. Some plans have re-employment clauses that could reduce or suspend your pension benefits if you return to the same company or a related entity.
Suppose you have a 401(k) or similar defined contribution plan. Working after retirement can be beneficial as it allows you to continue contributing to the plan, potentially increasing your retirement savings. However, required minimum distributions (RMDs) must begin at age 73, and working doesn’t exempt you from this requirement, except in specific cases where you’re still employed by the company sponsoring the plan.
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Medicare
Medicare is a federal health insurance program that covers individuals 65 and older. If you’re working for an employer that offers health insurance, you might have the option to delay enrolling in Medicare Part B (which covers outpatient care) without penalty. You can keep your employer’s coverage and enroll in Part B later. However, it’s essential to compare the benefits and costs of your employer’s plan versus Medicare to determine which is more advantageous.
Your Medicare Part B and Part D premiums are based on your income. If you return to work and your income increases, you may be in a higher income bracket, resulting in higher premiums. The income-related monthly adjustment amount (IRMAA) is recalculated annually based on your modified adjusted gross income (MAGI) from two years prior.
Should you work after retirement?
So, is working after retirement right for you? That depends on a few factors. To better understand how working after retirement might affect your benefits, let’s look at a few detailed scenarios.
Scenario 1: Early Retiree Re-Entering the Workforce
John, 62, decided to retire early and began collecting Social Security benefits. However, after a few years, he realizes his savings might not cover his increasing medical expenses. John is considering returning to work part-time. Since he is under his FRA, John must be mindful of the earnings limit. If he earns $30,000 in 2024, his benefits will be reduced because he exceeds the $21,240 threshold. However, when John reaches his FRA, his benefits will be recalculated, potentially increasing his monthly payments.
Scenario 2: Retiree with a Pension Working for a New Employer
Mary, 68, receives a pension from her previous employer. She decides to work part-time for a different company in a consulting role. Since her pension plan doesn’t have any re-employment restrictions, her pension benefits remain unaffected. Mary also enjoys the flexibility of continuing to contribute to her 401(k) plan offered by her new employer, boosting her retirement savings while delaying RMDs since she’s still working.
Scenario 3: Medicare-Eligible Retiree Weighing Employer Health Insurance vs. Medicare
Tom, 66, is eligible for Medicare but is offered health insurance by his new employer. He decides to compare the costs and coverage of his employer’s plan with Medicare. After reviewing, Tom finds that his employer’s plan offers better coverage at a lower cost. He opts to delay enrolling in Medicare Part B, knowing he can enroll later without penalty as long as he has employer coverage. However, Tom knows that his increased income from working may result in higher Medicare premiums.
Planning for a Successful Retirement
Whether you need to continue working or choose to, post-retirement work can be a rewarding and strategic decision. Engaging in comprehensive financial planning is crucial regardless of your retirement plans. Seeking guidance from professional financial advisors can help make your retirement goals a reality. Masters Insurance is here to help you ensure your saving plan matches your retirement priorities. Contact Masters Insurance today to learn more about working during retirement and retirement planning!