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Don’t Want to Quit Working in Retirement? Here’s How It Can Affect Your Financial Plan

April 19th, 2018 | 5 min. read

By Jacob Schroeder

Working in retirement affects financial plan - image

Working in retirement affects financial plan - imageIn 1945, a woman named Eleanor had a difficult choice to make. An employee at a company of which she was a major stakeholder was putting the company in jeopardy. She could either take the necessary steps to force the employee out, or potentially watch the company collapse during a very perilous time.

It seems like it would have been an easy choice. Especially, when you consider many people at the company also wanted the employee removed. He was tenaciously stubborn, and he struggled to meet the demands of the job as his physical and mental health rapidly deteriorated. Even the President of the United States at the time, Franklin D. Roosevelt, wanted this particular employee out, as he considered the situation a threat to the nation’s security during World War II. 

But, this was no ordinary employee at an ordinary company.

The employee Eleanor sought to expel was her father-in-law, Henry Ford, and the company was that bearing his family’s surname, Ford Motor Company. Eventually, she threatened to sell her considerable holdings of the company if he did not step down as president. After several years of holding out, Ford finally relented and handed the keys to his grandson and retired.

Ford, however, never stopped working. Until his death in 1947, he spent time each week at the Ford engineering laboratory, where he maintained a private office and workshop.

Born with an insatiable curiosity and mechanical aptitude, he loved to constantly work from a young age. Before he revolutionized transportation and manufacturing, he spent most of his youth tinkering with machines, from watches to steam engines. His admiration for work became legendary. He told the New York World Telegram, “I don't expect to retire. Every man must work, that's his natural destiny.”

You can find a plethora of examples of famous people who purposefully choose not to retire or found that retirement just wasn’t for them. Betty White. Michael Jordan. Every musician who goes on a farewell tour only to hit the road again a couple years later. 

But, many of us have come to the same conclusion. The fact is the classic notion of retirement – days lounging on the beach, catching up on reading the classics, etc. – isn’t the ideal lifestyle for many people. There can be diminishing returns on relaxation.

Nearly 3 in 4 Americans plan to work beyond traditional retirement age on at least a part-time basis, according to a Gallup poll.

A separate AARP study found that 37% of working Americans ages 50 to 64 said they intend to work after retiring from their current careers. Of those, 44 percent plan to enter new fields.

For some, it’s a necessity. But for many, it’s a choice.

Why People Work in Retirement

While factors such as longer life spans and limited retirement savings play a role in the growing number of older adults working, many also choose to work simply because they want to.

It’s not work in the traditional sense. It’s a new challenge. It’s pursuing a passion. It’s making a difference. It’s finding meaning and purpose each day.

A FlexJobs' survey of over 2,000 professionals at or near retirement found that 70% need to work to pay for basic necessities, but almost 60% said they work because they enjoy it.

Jumping feet first into retirement after a long career can be uncomfortable. You have to figure out how to use all of your newfound free time. As Henry Ford also said: “The unhappiest man on earth is the one who has nothing to do.”

In fact, 67% of U.S. workers said they'd prefer a “flexible transition” into retirement, according to the Transamerica Center for Retirement Studies.

Fortunately, older adults are also finding more opportunities to stay busy with the growing gig economy. A 2017 Prudential Financial survey found that 31% of individuals who work exclusively in the gig economy are baby boomers, or those age 56 and up. Of those workers, 34% said they are retired.

How Working in Retirement Can Affect Your Financial Plan

If you change your mind and decide that traditional retirement isn’t for you, or decide that you never want to stop working full-time, then your financial plan should change, too. There are both potential financial benefits and consequences for working in retirement.

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You may find yourself in a higher tax bracket

The additional income earned in retirement could bump you up into a higher tax bracket. Especially, if you are also receiving distributions from your traditional IRA or 401(k) or from a pension, which are taxed as income.

To avoid jumping to the next bracket, you may have to consider strategically timing your withdrawals, or taking them from taxable accounts, which are taxed as capital gains rather than income. Any investments sold for a loss could then be used to offset any capital gains.

You can delay withdrawals from your 401(k)

You must take required minimum distributions (RMDs) from traditional IRAs upon reaching age 70 ½, regardless of your work status. The same goes for your current 401(k), unless you continue to work. In that case, you can continue to defer withdrawals on your 401(k) plan until April 1 of the year you retire, as long as you don’t own 5% or more of the company you work for.

There’s more time to “catch-up” and boost your savings

If you don’t need the extra income, consider investing those funds and putting them to use. Workers age 50 and older qualify for catch-up contributions, which allows them to save an additional $6,000 in a 401(k) account and $1,000 in an IRA (2018).

Another option is to set up a 529 plan for a grandchild or great-grandchild. The savings in a 529 account can be used for tuition, books, and other education-related expenses at most accredited colleges and universities, U.S. vocational-technical schools, and eligible foreign institutions, as well as public, private and religious schools, grades K-12.

The IRA tax deduction goes away

Workers age 70 ½ and older no longer qualify for a tax deduction by making a traditional IRA contribution.

You can boost your Social Security payments

Social Security benefits are calculated based on your 35 highest income years, adjusted for inflation. It follows then, if you are earning more now than earlier in your career, you could increase your benefit by continuing to work.

It may make sense to delay Social Security until age 70

If you plan to work throughout your 60s, consider waiting to file for Social Security. After full retirement age (66 or 67, depending on your birth year), your benefit is permanently increased by 2/3% each month (8% per year) that you delay until age 70.

Beware of Social Security withholdings

If you receive work earnings and Social Security payments at the same time before reaching full retirement age, $1 is withheld for every $2 earned above a certain threshold ($17,040 in 2018). In the year you reach full retirement age, the threshold is increased ($45,360 in 2018) and $1 is withheld for every $3 earned above that amount.

After reaching full retirement age, work earnings don’t count against your benefit. Further, your benefit will be increased to reflect the months that it was reduced.

A portion of your Social Security benefit may be taxed

You must pay taxes on your benefits if your combined income (adjusted gross income, tax-exempt interest and half of your Social Security benefit) exceeds $25,000 ($32,000 for couples). But, no more than 85% of your benefit is taxable. 

Prepare for Medicare

At age 65, you are required to sign up for Medicare or may be subject to a late-enrollment penalty. Workers covered by an employer plan that covers 20 or more employees, however, are eligible to enroll later. You need to sign up for Medicare within eight months of leaving your employer or the health plan to avoid the penalty.

Ideally, retirement should be time spent doing whatever inspires you. If that means working, roll up your sleeves and get to it. As long as you plan ahead and adjust your finances accordingly, nothing should stand in your way. Anyone who tells you different would be best served to heed the words of Henry Ford: “I don't know anybody so old he can't do something useful. Just give them a chance and see.”