Four and a half million. That’s how many retired Americans, over age 50, decided to go back to work or take on part-time volunteer roles after retiring. And there are another 21 million who say they’re ready to join them, according to a 2014 Encore Career survey.
The reasons vary. Some want to make the most of their talents; some want social interaction; still others seek to keep their minds sharp and their bodies busy. The extra money doesn’t hurt either, especially since there are several unknowns that can cloud your retirement picture (e.g., longevity, inflation and long-term care needs).
If you think about it, even a part-time job that brings in $10,000 a year can be a significant boon to your retirement coffers. Of course, it’s not unheard of to make more than that as a consultant, freelancer or contractor in a professional field, but using the often quoted 4% annual withdrawal rate, adding $10,000 in income is basically equivalent to a year’s withdrawal on a $250,000 nest egg, which means you may be able to:
- Forgo your annual withdrawal altogether, allowing it another chance to grow as part of your financial plan.
- Use the extra discretionary income to enhance your standard of living. This could be particularly desirable in the first years of retirement when you want to take advantage of good health to accomplish your more active goals.
- Use it to supplement your Social Security, pension or annuity income, creating a buffer or safety net for your reliable income.
Working in retirement isn’t for everyone, but if you’re considering it, here are some things to think about first.
Reasons to “Unretire”
- Something Old. As mentioned earlier, some former retirees still have a lot of ideas to contribute in their field of choice. Many take on consultant roles or short-term contracting stints to share their ideas and experience while avoiding the 9-to-5 grind. And some employers have created encore career paths for retirees to retain and share that expertise with younger employees.
- Something New. Energetic retirees may want to try something new, or perhaps start a small business. In fact, almost a third of former retirees are now self-employed, spending about 21 hours a week nurturing their fledgling businesses.
- A source of strength. As Americans are living longer, healthier lives, it may make sense to continue working while you’re in good health. Many people derive a sense of well-being from their work and enjoy the physical and intellectual stimulation that comes along with it. And, using your brain while interacting with others can be extremely beneficial to your overall health and happiness. Research from the Stanford Center on Longevity shows that continuing to work can lead to better cognitive function.
- A Place, a Passion and a Purpose. Some seek to stave off boredom by having a reason to get out of the house on a regular basis. You may be passionate about lending your skills to a cause you care deeply about, and a nonprofit is sure to want your expertise and an extra set of hands to help further its work.
- Coffer Filler. Planning for retirement means accounting for market gyrations and inflation, but of course, you can’t predict everything. To create some padding in your retirement coffers, you may want to consider going back to work. Doing so could allow your nest egg time to recover and, hopefully, compound over time. Even if you plan a careful and sustainable withdrawal strategy, you may still overspend if something unexpected comes your way, and extra income can help you stay on track. For a lot of people, working longer makes it possible to add to their savings and maintain their quality of life.
Tip: If you need more money than you’re earning, or are required to take an IRA distribution, it may be best to first withdraw funds from your after-tax accounts, such as checking, savings or brokerage accounts.
Financial Factors to Factor In
- Savings. In most cases, you should also be able to contribute to an employer-sponsored qualified retirement plan (subject to contribution limits) as long as you’re working. If you’re under 70½, you can also contribute to a traditional IRA if you meet the requirements.
- The Tax Man. It’s possible that working (even an extra year or two) might push you into a higher tax bracket, especially if you’re taking taxable distributions from your IRA that count as income on top of your salary. It’s important to know your tax bracket and just how close you are to the next highest threshold.
- Government Benefits. New income could affect your Social Security benefits prior to reaching Full Retirement Age (FRA). There’s a $1 reduction for every $2 you earn above the annual limit. For 2015, that limit is $15,720. The year you reach FRA, Social Security will deduct $1 in benefits for every $3 you earn above the limit ($41,880 for 2015). In both cases, you’ll get deducted benefits back later. After FRA, extra income doesn’t affect your benefits, no matter how much you earn. A word to the wise: If you make over a certain amount, your Social Security benefits could be taxable. Also, if you’re receiving Medicare benefits, you’ll want to know how employer-offered insurance works with Medicare or if going back to work might kick you into a higher premium category. Be sure to discuss these issues with your financial and tax advisors before accepting a new gig.
Off to Work you Go?
Many Americans rely on work to define their identity and their days, but just as many dream of an idyllic retirement with no time constraints. Both may be right for you at different stages of your post-career years. Just be sure to carefully review the reasons behind your decision and the possible impact on your financial plan before you punch the proverbial clock once again.
Material prepared by Raymond James for use by its financial advisors.
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