‘Unretirement’: Financial implications of going back to work | MassMutual

‘Unretirement’: Financial implications of going back to work

Shelly Gigante

By Shelly Gigante
Shelly Gigante specializes in personal finance issues. Her work has appeared in a variety of publications and news websites.
Posted on Apr 12, 2022

Retirement is often perceived as a finish line — the carrot at the end of the stick that compels us to keep punching the clock — the financial reward for decades of diligent saving. But for many retirees who bounce back into the workforce after calling it quits — unretiring, so to speak — retirement looks more like a moving target than a hard stop.

Indeed, nearly half a million people aged 55 or older have entered the workforce in the last six months, a substantial rise over previous time periods, according to the Bureau of Labor Statistics. And continuing surges in inflation may sustain that "unretirement" trend, as increases in the cost-of-living exert pressure on retirees living on a fixed income.

Yet, jumping back into the workforce as a senior can also present some financial challenges that may necessitate a conversation with your financial professional. Older workers must consider the implications to their:

“Once retirement begins, the big reason for continuous dialogue with your financial professional is to do everything you can to eliminate the possibility of outliving your assets, so having regular conversations is key,” said John Pearson, a financial professional and certified public accountant with Barnum Financial Group in Stamford, Connecticut. “Certainly, any alteration to an existing retirement plan should be part of that discussion.”

Unretirement happens

Despite the recent increase, so-called unretirement is not an entirely new phenomenon.

A 2018 survey by Rand Corp. found that 40 percent of American workers 65 and older who were employed indicated that they had previously retired at some point.1

The survey, one of the first to dub the trend “unretirement,” also found that nearly half (46 percent) of retirees aged 50 and older would return to work under the right conditions. Most said having control over their work, the ability to set their own pace, and the physical demands of the job were most important to them, compared with younger workers who prioritized benefits.

Some retirees — like many recently facing new inflation-pressured retirement math — return to work to supplement their income. But many others do so for a sense of purpose. That’s not surprising given that baby boomers are among the most educated generational cohorts in history.

Often, older workers opt to leave their prior profession and start a side-hustle or work part time in an industry that is a personal passion. To facilitate, the AARP provides a database of jobs, workshops, skills training, and coaching services for job seekers age 50 and older.

The benefits of working longer

The benefits of working past the traditional age of retirement are many. Studies suggest seniors who continue working at a job they enjoy report a greater sense of purpose and social connectivity, which boosts their emotional well-being. Work may also improve cognitive health, according to studies.2,3

The extra income doesn’t hurt either, of course, enabling older workers to fortify their savings and delay withdrawals from their retirement accounts, which can potentially improve their long-term financial security. (Calculator: How much should I save for retirement?)

Indeed, the SECURE Act of 2019 pushed back the age at which you must begin taking withdrawals from your tax-deferred 401(k) and IRA to 72 from 70 ½ . That allows your savings to grow longer. (Related: 3 points to know about the SECURE Act)

Social Security implications

Returning to work during retirement could have implications for your Social Security checks, which may result in either a higher or lower benefit check for you and your family.

For example, your paycheck may allow you to delay claiming first-time Social Security benefits past your full retirement age, which enables you to accumulate credits and permanently boost the size of your future benefits.

If you were born in 1943 or later, for every year you delay taking Social Security benefits beyond your full retirement age, which is either 66 or 67 depending on your birth year, the government offers delayed retirement credits, according to the Social Security Administration. These delayed retirement credits equal up to 8 percent per year in simple interest increases. A monthly benefit of $1,000 at full retirement age of 66 would increase to $1,320 if delayed until age 70.4 (Related: 4 simple ways to delay Social Security)

That said, if you are already collecting Social Security benefits and go back to earning a paycheck, you may potentially suspend or lose some of your benefits, depending on your age.

  • If you are under full retirement age for the entire year, the government will deduct $1 from your benefit payments for every $2 you earn above the annual limit. For 2021, that limit is $18,960.5
  • During the year you reach full retirement age, the government will deduct $1 in benefits for every $3 you earn above a different limit. For 2021, that limit is $50,520.
  • And after you reach full retirement age, your earnings will no longer reduce your benefits, regardless of how much you earn.

“Before age 65, it might very well reduce the amount of your Social Security benefit depending on how much earned income you have,” said Pearson.

The Social Security Administration offers a Retirement Earnings Test Calculator to help you determine the effect of your paycheck on your retirement benefits. You can also use their online Retirement Age Calculator to determine your full retirement age.

Medicare

Retirees who return to work must also tread carefully with their Medicare coverage.

If your new employer offers health coverage that is considered acceptable as primary coverage, you are allowed to drop Medicare and reenroll later without penalty, according to the AARP. If you drop Medicare and do not have acceptable employer coverage, however, you will face penalties when getting Medicare back.6

Alternatively, you may have both Medicare and employer health insurance coverage at the same time. One would simply act as your primary coverage and the other would serve as secondary coverage. Keep in mind, however, that when you have Medicare, you cannot contribute funds to a health savings account (HSA) through your employer without incurring a tax penalty. But you can still use any funds currently in your HSA to cover expenses like Medicare premiums, copayments, and deductibles.7

Depending on the job, that employment could provide employee benefits that could reduce outside costs like Medicare supplements and provide dental insurance as well as some possible life insurance,” said Pearson. “But your Medicare Part B and Part D costs could also be adjusted higher if your income reaches certain thresholds so that could increase the cost of your medical insurance.”

Before making changes to their Medicare coverage, AARP suggests consumers carefully consider any preexisting conditions they may have. If you drop Medicare Part B, it notes, you will also have to drop any Medigap plan you may have, which could make it difficult to reenroll later with a preexisting condition.

Pensions and 401(k)s

Returning to the workforce post retirement can also potentially affect your pension and your tax-deferred retirement accounts.

In most cases, you can still collect any pension you are owed if you return to work for a different employer, according to online retirement resource RetireGuide.

If you return to your former employer, however, you may have to be rehired as a part-time or contract worker if you want to continue receiving pension benefits. And some companies may suspend your benefits temporarily while you are employed.

As a rule of thumb, it’s always wise to review your plan details and speak with your human resources representative before making any decisions that could affect your benefits.

As for your tax-deferred retirement accounts, new legislation may permit you to continue making contributions past the traditional age of retirement while you are employed.

The SECURE Act of 2019 not only increased the age at which mandatory withdrawals must begin (now 72), but it also eliminated the 70 ½-year-old age limit on contributing to a traditional IRA, permitting all retirees to contribute to a traditional IRA or 401(k) if they earn wages.

Remember, too, that those age 50 or older can contribute an extra $1,000 per year to their IRA (for a 2021 total of $7,000) and an extra $6,500 per year to their 401(k) account ($26,000 total for 2021).8

Aging adults are rewriting the rules for retirement. Many these days are heading back into the workplace after taking a break, in some cases for the paycheck, but more often because they seek a sense of purpose and community.

If you plan to join them, take the time to research the financial implications to your Social Security and Medicare benefits, as well as your pension plan and retirement accounts.

Discover more from MassMutual…

The unexpected problems with early retirement

Social Security filing strategies

Should you move to a 55-and-older community?

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1 Rand Corp., “American Working Conditions Survey,” 2018.

2 Rand Corp., “Mental Retirement,” 2009.

3 PubMed.gov, “Older age at retirement is associated with decreased risk of dementia,” May 4, 2014.

https://pubmed.ncbi.nlm.nih.gov/24791704/

4 Social Security Administration, “When to Start Receiving Retirement Benefits,” 2020.

5 Social Security Administration, “What happens if you work and get Social Security retirement benefits?” Jan. 14, 2021.

6 AARP, Medicare Plans from UnitedHealthcare, “Does Medicare Coverage Change if I Return to Work?” Oct. 1, 2021.

7 Healthline, “Can You Have a Health Savings Account (HSA) and Medicare?” Sept. 23, 2020.

8 Internal Revenue Service, “COLA Increases for Dollar Limitations on Benefits and Contributions,” Nov. 13, 2020.

The information provided is not written or intended as specific tax or legal advice. MassMutual and its subsidiaries, employees, and representatives are not authorized to give tax or legal advice. You are encouraged to seek advice from your own tax or legal counsel. Opinions expressed by those interviewed are their own and do not necessarily represent the views of MassMutual.