Ready for an encore? Unretire.
Four and a half million retired Americans, over age 50, have gone back to work or taken on volunteer roles. And another 21 million are ready to join them, according to a 2014 Encore Career survey. The question is: Why?
Some want to continue using their talents. Some crave more social interaction. Some simply like keeping their minds sharp and bodies busy. Regardless, the extra money doesn’t hurt.
Even a part-time job bringing in $10,000 a year can significantly benefit your retirement coffers. Using a 4% annual withdrawal rate, adding $10,000 is basically equivalent to a year’s withdrawal on $250,000, which means you may be able to:
Forgo your annual withdrawal altogether, allowing it another chance to grow.
Use the extra income to enhance your lifestyle.
Supplement Social Security, pension or annuity income.
Reasons retirees “unretire”
Something old. Some retirees still have ideas to contribute in their field and take on consultant roles or short-term contracting stints. And some employers have created encore career paths for retirees to retain and share their expertise with younger employees.
Something new. Energetic retirees may try new things, or perhaps start a small business. In fact, almost a third of former retirees are now self-employed.
A source of strength. Many people derive a sense of well-being from their work and enjoy the stimulation that comes with it. Research from the Stanford Center on Longevity shows that continuing to work can also lead to better cognitive function.
A place, passion and purpose. Some enjoy having a reason to leave the house on a regular basis, whether for work or to help a nonprofit with a cause they care about.
Coffer filler. You can plan a careful and sustainable withdrawal strategy, but you can’t predict everything. Going back to work could create padding, allowing your nest egg time to recover from the unexpected and, hopefully, compound over time.
Financial factors to factor in
Savings. In most cases, you should 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 70 1/2, you can also contribute to a traditional IRA if you meet the requirements.
The tax man. Working (even an extra year or two) could possibly 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 is important to know your bracket and just how close you are to the next 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. The year you reach FRA, Social Security will deduct $1 in benefits for every $3 you earn above the limit. In both cases, you’ll get deducted benefits back later. After FRA, extra income doesn’t affect your benefits. Note: If you make over a certain amount, your benefits could be taxable.
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.
After FRA, extra income doesn’t affect your benefits.
Off to work you go?
Many Americans rely on work to shape their identity and days, while others dream of having no time constraints. Both options may be right for you at different stages of retirement. Just be sure to review the reasons behind your decision and the possible impact on your financial plan.
Material prepared by Raymond James for use by its financial advisors.
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