Financial Aspects of “Unretirement”

The year 2021 was noteworthy for the “Great Resignation” as about 47 million people quit jobs last year. The year 2022 is equally noteworthy for a “Great Unretirement” as millions of older workers who left jobs during the pandemic decided to come back into the labor force. One study found 1 in 5 retirees were likely to start working again soon.

Factors contributing to this trend include:

 1. a high demand for workers (sometimes coupled with increased pay, signing bonuses, and/or remote-work flexibility)

 2. vaccinations and booster shots reducing COVID infection fears

3. high inflation that increased living expenses 

4. a poorly performing stock market decreasing retirees’ savings account balances. 

Some “unretirees” may have also gotten bored with too much unstructured free time and simply want to stay productive. Others may no longer be caregivers for a spouse or aging parents, which is why they retired previously.

 

Benefits of unretirement (or remaining employed immediately following a primary career, as I have done) include:

 

¨    Additional Income- Money is available for living expenses, home maintenance, and/or “extras” such as travel

¨    Sense of Purpose- Work provides outlets for creativity, a way to help others, and a sense of meaning and purpose

¨    Socialization- Life after full-time work can be isolating and working helps keep older adults socially connected

¨    Longer Life Expectancy- Research has found that working past age 65 may lead to a longer life vs. retiring early

¨    Staying Current- Continued work keeps job skills (e.g., computers and technical expertise) and contacts up-to-date

 

Whatever a person’s reason for unretiring, re-entering the labor force after being away for a year or more requires some advance financial planning. Below are six factors to consider:

 

Social Security Earnings Limit- Before full retirement age or FRA (e.g., 67 for workers born in 1960 or later), Social Security deducts $1 from benefits for every $2 earned above the annual limit ($19,560 in 2022). While benefits are withheld during this time, they could be larger later as payment amounts are recalculated to account for a person’s longer work history. Above FRA, there is no earnings limit to obtain full Social Security benefits.

 

Tax on Social Security Benefits- Income from unretiring may push older taxpayers into the income range where tax is due on a portion of Social Security benefits. For individual taxpayers, if combined income (adjusted gross income or AGI + nontaxable interest + ½ of Social Security benefits) is between $25,000 and $34,000, up to 50% of benefits are taxable. For income more than $34,000, up to 85% of benefits may be taxable. For married couples filing jointly, the income ranges are between $32,000 and $44,000 (50%) and more than $44,000 (85%), respectively.

 

Tax Withholding Adjustments- Adding income from employment to what could be multiple streams of income in later life (e.g., pension, Social Security, annuities, required minimum distributions) may necessitate adjustments in tax withholding or quarterly estimated tax payments. The IRS Tax Withholding Estimator online tool can help make an accurate withholding projection and the IRS safe harbor rules can help taxpayers avoid underpayment penalties.

 

Higher Income Tax Payments- Again, adding employment income to several other income sources in later life can place taxpayers in a higher tax bracket. It could also trigger higher Medicare Part B and Part D premium surcharges known as IRMAA (income-related monthly adjustment amount) and/or the 3.8% net investment income tax (NIIT), which affects individuals with a modified AGI (MAGI) of $200,000+ and couples with a $250,000+ MAGI.

 

Medicare- Older adults age 65+ who are on Medicare, begin working again, and receive primary creditable employer-provided health insurance coverage (i.e., coverage that meets certain minimum requirements) can drop Medicare and re-enroll later when they stop working again. By doing this, they avoid having to make monthly premium payments for Medicare Parts B, C, and/or D while they are working. The coverage must be deemed creditable or late enrollment penalties will apply. A new job may also provide access to valuable employer term life and disability insurance.

 

Budget Adjustments- Additional income earned by unretiring should be factored into household spending and saving via an updated spending plan (budget). This money provides an opportunity to help keep pace with recent price increases (e.g., food, gas, utilities, housing, etc.) caused by high inflation and to beef up retirement savings in IRAs and employer retirement savings  accounts, if necessary.

 

Bottom Line: If you are considering “unretirement,” be sure to cover your financial bases, especially budgeting, taxes, and health insurance. Best wishes for a great encore career.

 

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.