2 Pitfalls of Working in Retirement You Should Know About
Some people retire and want nothing more than to forgo all forms of work for the rest of their lives. But you may want to take a different approach.
There are several benefits to working during retirement. First, there’s the money. Social Security often does a poor job of keeping up with inflation, so if you earn some cash by working, you can supplement those benefits nicely.
Furthermore, a lot of people don’t manage to bring much savings with them into retirement. If your 401(k) or IRA balance isn’t much to write home about, then it pays to boost your income by working.
Working can also have social and mental health benefits. It can be hard to not have any structure to your days, whereas if you work, you’ll have a place to go from time to time. Working could also serve as a nice social outlet at a time when you might otherwise start to feel isolated.
While there are a number of clear perks to holding down a job in retirement, there are also certain pitfalls you might end up encountering. Here are a couple to keep in mind.
1. You could end up getting taxed more
Taxpayers don’t pay a uniform rate on the money they earn. Rather, higher earners are subject to a larger tax burden on their highest dollars of earnings. That’s a situation you might face if you decide to work in retirement since it’s your total income — including your nest-egg withdrawals and Social Security benefits — that will be taken into account in that regard.
2. You could end up having Social Security benefits withheld
Some people opt to sign up for Social Security before reaching full retirement age (FRA). If you do the same and you then decide to work, you could end up having some of your benefits withheld, depending on your earnings.
This year, you can earn up to $19,560 without impacting your benefits. From there, however, you’ll have $1 in Social Security withheld per $2 of income you bring home.
If you’re reaching FRA this year, you can earn more money before your benefits are withheld — up to $51,960. But from there, you’ll have $1 in Social Security withheld per $3 of income.
Should you hold down a job in retirement?
While you might end up in a higher tax bracket by virtue of working in retirement, and you could end up having some Social Security income withheld if you file for benefits before FRA, ultimately, having a job could still end up being a great thing for you. That said, you should be aware of these pitfalls and plan around them — or make decisions to avoid them.
For the latter, that could mean holding off on claiming Social Security until FRA if you know you’d like to work in some capacity as a retiree. Once you reach FRA, you can earn as much income as you’d like without having your benefits impacted in the slightest.
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