The labor market is experiencing a significant shift towards an older workforce, as projected by the Bureau of Labor Statistics. Workers aged 55 and over are expected to contribute the most to this growth in the next decade. Surveys indicate that a rising number of individuals aged 65 to 74 anticipate working in 2030, with a notable increase from previous years. These older workers, constituting just 35% of the population, comprise around 40% of the country’s economic output.
Research investigating the reasons behind extending work beyond retirement age or re-entering the workforce after retirement reveals that older Americans choose to continue working because they can or want to. Financial considerations emerged as a primary factor, with 26% citing the need to work for financial stability. In contrast, 13% mentioned wanting additional retirement savings or finding purpose through work. Notably, 92% of respondents expressed a need or desire for more money in retirement, including those who were previously retired and those working beyond the traditional retirement age. Furthermore, a significant proportion (60%) reported having savings of less than $500,000, encompassing various financial assets.
Retirement has undergone a significant transformation due to longer life expectancies and advancements in healthcare. Many individuals reaching retirement age today can anticipate living well into their 90s or even beyond, potentially spending as much time in retirement as they did working. Consequently, financial resources become crucial for sustaining one’s desired lifestyle throughout this extended retirement period.
However, the decision to prolong work is not solely driven by financial concerns. Research suggests that work offers physical and mental stimulation, social engagement, and a sense of purpose, contributing to maintaining cognitive abilities as individuals age. Findings from a study on retirees rejoining the workforce revealed reasons such as combating boredom, dealing with loneliness, and coping with inflation as motivations for returning to work.
Whether motivated by personal or financial factors, individuals considering working in retirement must carefully evaluate the impact of earned income on other aspects of their financial situation. This includes taxes, Social Security benefits, healthcare, and additional benefits. Here are five important factors to consider when working beyond traditional retirement age:
1. Social Security Earnings Test:
Working and earning above specific thresholds before reaching full retirement age (FRA) can reduce Social Security benefits. The test exempts a certain amount of earned income annually based on FRA attainment. Income above these exempt amounts leads to benefit reductions, and withheld benefits are added incrementally to monthly payments after reaching FRA.
2. Taxes on Social Security Benefits:
Earned income from work may trigger taxes on Social Security benefits, with income brackets varying based on filing status. Federal taxes on benefits apply when combined or provisional income surpasses specific thresholds.
3. Medicare Costs:
Higher-income from work can lead to increased Medicare Part B and Part D coverage premiums. Medicare premiums are calculated based on modified adjusted gross income (MAGI), and premium surcharges come into effect above certain income thresholds.
4. Delaying Required Minimum Distributions (RMDs):
The SECURE 2.0 Act of 2022 raised the age for initiating RMDs to 73, starting from 2023. Individuals participating in workplace retirement plans can delay taking RMDs until retirement, allowing their savings to continue growing and potentially providing tax benefits while working.
5. Work-Related Expenses:
While remote work options have become more prevalent, there are still associated costs that employers, such as equipment, supplies, and internet access, may not reimburse. Self-employed individuals can deduct most home office expenses, but those working outside their homes must budget for additional expenses like transportation, parking, clothing, and meals.
Collaborating with an independent wealth advisor is highly recommended for individuals working beyond the traditional retirement age or considering re-entering the workforce. Such advisors can help develop a comprehensive plan tailored to specific goals, addressing financial priorities and educating individuals on the opportunities and challenges of working in retirement.