|Kiplinger.com, Summer, 2017. This article was written with Brian Vnak, the Vice President of Advisory Services at Wealth Enhancement Group. It was part of a series of articles developed under an agreement with Kiplinger negotiated by me to designate Mr. Vnak as a contributor and to deliver original articles for them on a regular basis.|
Keeping a hand in the workforce after retirement can be richly rewarding (in a couple of key ways). However, it can also complicate your finances.
Some people’s retirement dreams consist of having the time to do what they want, unencumbered by the demands of working. For others, staying in the workforce on a part-time basis, either out of necessity or by choice, is a core component of their retirement picture.
Keeping a hand in the workforce is a growing trend and for good reason: Part-time employment in retirement is a way to supplement cash flow, maintain employer benefits and stay mentally and physically engaged.
Part-time work is very healthy from a financial-planning standpoint.
For instance, every year you work improves your earnings history, which can increase the amount of Social Security you receive. Further, part-time earnings may allow you to delay taking Social Security benefits, which increase by 8% every year past your full retirement age, up to age 70.
Earnings from a part-time job may also mean you can delay spending down your retirement accounts, giving them more time to potentially grow. An extra three to five years — especially if it coincides with a rising market — can have a tremendously powerful impact on the sustainability of your portfolio.
Finally, part-time work may offer access to employer benefits, such as health insurance and contributing to tax-efficient employer sponsored plans like 401(k)s — not to mention getting the employer match, which is literally free money. As an added benefit, any funds inside your current employer’s plan will escape required minimum distributions at age 70½ and later, as long as you remain actively employed. Funds in an inactive 401(k) from a former employer would be subject to required minimum distributions. But this can be avoided if the inactive accounts are consolidated with your current employer’s 401(k) account (assuming the employer accepts rollovers).
Unfortunately, working part-time in retirement can also complicate your finances.
First, if you’re already taking Social Security, your benefits are taxable based on other income sources, such as wages, dividends, capital gains, retirement account distributions, and yes, 50% of your Social Security benefits (among other items). A part-time job means you’ll have more income, but this extra income may adversely affect your Social Security benefit.
Your part-time income may also put you in a higher tax bracket — not just for income taxes, but for capital gains taxes, too. Many retirees capitalize on their lower-income years by taking gains when they’re in the 0% capital gains tax bracket, so you may not be able to take advantage of savvy tax-planning moves like capital gains harvesting and Roth conversions.
If your part-time income puts you at or above the 25% income tax bracket, you may find yourself subject to a 15% or 20% capital gains tax rate. In a worst-case scenario, the part-time earnings you make could be significantly reduced by taxes you pay on capital gains.
Let your passions guide you
Part-time work can help you stay mentally sharp, socially engaged and physically fit. And there’s the benefit of putting a lifetime of skills to work, or finally turning your attention to a lifelong passion.
Still, it’s a slippery slope. Part-time work can easily morph into full-time work, especially if you’re prone to workaholism. And for those who put their years of experience to work in consulting may find running a business, even a tiny one-person proprietorship, more expensive and onerous than imagined.
The bottom line
Whether it’s the financial cushion or because you truly love working that’s driving your decision to work part-time, it’s in your best interest to understand how this decision will change your plan for the future.
Ask yourself and/or your adviser the following questions to help you evaluate the pros/cons of working part-time in retirement:
- How will working part-time in retirement enhance my ability to achieve my ideal retirement lifestyle?
- What “ripple effects” might working part-time in retirement bring to my financial plan? Would it put me in a higher tax bracket and/or disrupt any existing tax strategies?
Finally: Remember that part-time work doesn’t just impact your financial bottom line; it also affects your mind, body, family and friends. Be thoughtful of how you spend your time.