A Working Retirement that Doesn’t Wreak Havoc on Benefits

Having a job in retirement may sound like reading a book while sleeping. Isn’t the idea to notwork in retirement? For some retirees, working to obtain extra income may be a necessity. One retiree noted on AARP’s board that due to medical expenses in the family, the planned retirement account was depleted and returning to the work force appeared to be the only option. This scenario is, perhaps unsurprisingly, becoming more and more common.
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Aside from those who want to return to work due to financial constraints, some retirees may want to work in a new or different capacity. Some employees have a dream retirement job that may be financially impractical during their working years but delightful as a retirement job, such as dog grooming, cake baking or even working the front desk at their favorite gym.
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For those who return to work, or choose a retirement job, they may be able to reap extra retirement benefits if they work with their advisor to capture the best scenario. This may include understanding how their social security benefits, required minimum distributions from 401ks and Roth IRAs could be impacted by working in retirement. This may also include whether the retiree wants to work full or part time. These considerations may influence a retiree to choose one employer over another.
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According to the Social Security Administration (SSA), retirees can work while they receive social security benefits (including survivor benefits). That work could result in a higher benefit later on, if the earnings for the prior year were higher than the years the SSA used to compute retirement benefits. For those who are less than the full retirement age, a deduction in payments could occur. For those who have reached SSA’s full retirement age (between 65 and 67), a deduction is made for earnings above $46,920 (for 2019).  And for those beyond retirement age (e.g., over 68), no deduction is made on earnings. This is true for those who retire, claim SSA benefits, and then must return to work.
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In addition to the potential impact on social security, return to work retirees may also need to consider additional costs for Medicare Parts B and D, for those who earn more than $85,000 individually. Other considerations include the required minimum distribution at age 70.5. Those RMDs are still required, even if the retired to worker is working full time.
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The key for many who return to work may be the ability to participate in a 401(k) plan, possibly without having to take an RMD from that new employer’s plan. And given that those over 50 can take advantage of the special rules for catch up provisions, retirees who need to replace a 401k depletion, like the example above, may be able to contribute significant amounts into a 401k. While return to work retirees may need to replace significant amounts (or make up for a change in retirement planning such as divorce or disinheritance), the amount contributed cannot exceed the amount earned. There may also be options for moving funds from a traditional retirement account into a Roth account that could be discussed with a financial advisor, especially where the RMD amount is more than needed for retirement living.
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Additionally, retirees who return to work may be eligible to continue to invest in 401ks, if the employer allows it. Some employers automatically enroll all employees in a 401k regardless of employment status. Under IRS rules, a plan cannot exclude an employee based on a specific age, once that employee has reached the age of 21. For retirees who return to work part-time, they may get an added benefit of wages without depleting their retirement funds, depending on whether they return to their original employer or choose a new employer.

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