According to the
Research Institute's 2021
Survey, 72% of workers
plan to work for pay in retirement,
compared to 30% of retirees who say they have worked for pay during retirement. If you plan
to work during retirement,
consider how you might
adjust your plans if health challenges prevent you from working or you find it difficult securing suitable employment.
If you have private or
employer-sponsored health insurance, talk to your benefits administrator or
insurance representative before enrolling in Medicare to find out how your
current health insurance fits in with Medicare.
Working During Retirement
Planning on working during retirement? If so, you're not alone. An increasing
number of employees nearing retirement plan to work at least some period of time
during their retirement years.
Why work during retirement?
Obviously, if you work during retirement, you'll be earning money and relying
less on your retirement savings — leaving more to potentially grow for the future
and making your savings last longer, as shown in the example below:
- Retirement savings: $1,000,000
- Earnings rate: 6%
- Preretirement income: $150,000
- Social Security: $2,000/month
- Desired income replacement: 80% ($120,000/year,
Without working, you'll need to use $8,000 ($10,000 desired income minus $2,000
Social Security) of retirement savings per month, and your savings will last 16
|But if you earn
monthly:||for 3 years,
your savings will
last:||for 5 years, your savings will
last:||for 10 years, your savings will
|$1,000||17 years||18 years||19 years|
|$2,000||18 years||19 years||22 years|
|$3,000||19 years||21 years||26 years|
|$4,000||20 years||23 years||32 years|
|$5,000||22 years||26 years||39 years|
|This is a hypothetical example and is not intended
to reflect the actual performance of any specific investment and does not take
into account the effect of fees, expenses, taxes, and inflation.|
If you continue to work, you may also have access to affordable health care, as
more and more employers are offering this important benefit to part-time
But there are also non-economic reasons for working during retirement. Many
retirees work for personal fulfillment — to stay mentally and physically active,
to enjoy the social benefits of working, and to try their hand at something
new — the reasons are as varied as the number of retirees.
How working affects Social Security
If you work after you start receiving Social Security retirement benefits, your
earnings may affect the amount of your benefit check. Your monthly benefit is
based on your lifetime earnings. When you become entitled to retirement benefits
at age 62, the Social Security Administration calculates your primary insurance
amount (PIA), upon which your retirement benefit will be based. Your PIA is
recalculated annually if you have any new earnings that might increase your
benefit. So if you continue to work after you start receiving retirement
benefits, these earnings may increase your PIA and thus your future Social
Security retirement benefit.
But working may also cause a reduction in your current benefit. If you've reached
full retirement age (66 to 67, depending on when you were born), you don't need
to worry about this — you can earn as much as you want without affecting your
Social Security retirement benefit.
you haven't yet reached full retirement age, $1 in benefits will be withheld
for every $2 you earn over the annual earnings limit ($19,560 in 2022). A
special rule applies in your first year of Social Security retirement — you'll
get your full benefit for any month you earn less than one-twelfth of the annual
earnings limit, regardless of how much you earn during the entire year. A higher
earnings limit applies in the year you reach full retirement age. If you earn
more than this higher limit ($51,960 in 2022), $1 in benefits will be withheld
for every $3 you earn over that amount, until the month you reach full
retirement age — then you'll get your full benefit no matter how much you earn.
(If your current benefit is reduced because of excess earnings, you may be
entitled to an upward adjustment in your benefit once you reach full retirement
Not all income reduces your Social Security benefit. In general, Social Security
only takes into account wages you've earned as an employee, net earnings from
self-employment and other types of work-related income, such as bonuses,
commissions, and fees. Pensions, annuities, IRA distributions, and investment
income won't reduce your benefit.
Also, keep in mind that working may enable you to put off receiving your Social
Security benefit until a later date. In general, the later you begin receiving
benefit payments, the greater your benefit will be. Whether delaying the start
of Social Security benefits is the right decision for you, however, depends on
your personal circumstances.
One last important point to consider: In general, your Social Security benefit
won't be subject to federal income tax if that's the only income you receive
during the year. But if you work during retirement (or receive any other taxable
income or tax-exempt interest), a portion of your benefit may become taxable. IRS
Publication 915 has a worksheet that can help you determine whether any part of
your Social Security benefit is subject to federal income tax.
How working affects your pension
If you work for someone other than your original employer, your pension benefit
won't be affected at all — you can work, receive a salary from your new employer,
and also receive your pension benefit from your original employer.
But if you
continue to work past your normal retirement date for the same employer, or if
you retire and then return to work for that employer, you need to understand how
your pension will be affected.
Some plans will allow you to start receiving your pension benefit once you reach
the plan's normal retirement age, even if you continue to work. Other plans will
suspend your pension benefit if you work beyond your normal retirement date, but
will actuarially increase your payment when benefits resume to account for the
period of time benefits were suspended. Still other plans will suspend your
benefit for any month you work more than 40 hours, and will not provide any
actuarial increase — in effect, you'll forfeit your benefit for any month you
work more than 40 hours.
Some plans provide yet another option — "phased retirement." These programs allow
you to continue to work on a part-time basis while accessing all or part of your
pension benefit. Federal law encourages these phased retirement programs by
allowing pension plans to start paying benefits once you reach age 62, even if
you're still working and haven't yet reached the plan's normal retirement age.
If your pension plan calculates benefits using final average pay, be sure to
discuss with your plan administrator how your particular benefit might be
affected by the decision to work part-time. In some cases, reducing your hours
at the end of your career could reduce your final average pay, resulting in a
smaller benefit than you might otherwise have received.
How working affects health benefits
Many individuals work during retirement to keep their medical
coverage. If working during retirement means you will move
from full-time to part-time, it's important that you fully understand
how that decision will impact your medical benefits.
Some employers, especially those with phased retirement programs, offer medical
coverage to part-time employees.
But other employers don't, or require
that you work a minimum number of hours to remain eligible for benefits. If your
employer doesn't offer medical benefits to part-time employees, you'll need to
look for coverage elsewhere. If you're married, the obvious option is coverage
under your spouse's health plan, if your spouse works and has coverage
available. If not, you may be eligible for COBRA.
COBRA is a federal law that allows you to continue receiving medical benefits
under your employer's plan for some period of time, usually for 18 months, after
a qualifying event (including loss of coverage due to a reduction in hours). But
it's expensive — you typically have to pay the full premium yourself, plus a 2%
administrative fee. (COBRA doesn't apply to employers that have fewer than 20
employees.) Other options are coverage through a state or federal exchange, or private health insurance.
Of course, once you turn 65, you'll be eligible for Medicare. You'll want to
contact the Social Security Administration approximately three months before
your 65th birthday to discuss your options.