6 Ways Going Back To Work Could Impact Your Retirement Portfolio
Most Americans dream of “riding off into the sunset” once they retire, never again going back to the workforce. But unfortunately, a combination of factors, including rising costs and insufficient nest eggs, are forcing many Americans back into the workplace.
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According to a study from T. Rowe Price, about 20% of American retirees are actually working on a full- or part-time basis. Certainly, some retirees work just to keep their minds occupied or to otherwise keep themselves busy, but many actually need to in order to fully fund their retirement. Regardless of what may make you work during retirement, it’s important to know the financial effects it can have on you, both positive and negative. Here are some of the most important.
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You Might Be Able To Extend the Life of Your Nest Egg
Financially speaking, the biggest benefit of returning to the workforce after retiring is that you will extend the life of your nest egg. For one thing, you will be able to either reduce or even eliminate your withdrawals while you’re working, as your income should fund your lifestyle. You can even make additional contributions, rather than withdrawals, if you’re earning enough. And with reduced or eliminated withdrawals, your retirement nest egg will be able to compound even faster, providing you with an even bigger account value by the time you really need it.
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You May Be Able To Boost Your Investment Risk Profile
Most seniors take a more conservative approach to their investments once they retire, and rightly so. Without a regular source of income, any dip in their account values can greatly impact their retirement income. But if you’re going to continue working, you might be able to keep your risk level up for a bit longer. The additional income you’re generating can not only help you ride out declines in your portfolio, it can actually allow you to take advantage of them by adding more funds when prices are low.
Your Social Security May Become Taxable
One of the downsides of working after you retire is that if you’re receiving Social Security, your payments may become taxable. Specifically, if you’re a single person earning between $25,000 and $34,000, your benefits may be taxed as much as 50%, while if you earn more than $34,000, that jumps to 85%. For joint filers, those limits are $32,000 and $44,000, respectively.
In most cases, the extra money you earn will more than offset any extra taxes you have to pay. However, it’s important to be aware of this change. Depending on your age, you may be able to suspend your benefits and restart them at a later date, which could make sense for certain retirees who decide to work again. You may want to consult with a tax or financial advisor for additional insight.
Medicare May Become More Expensive
While Medicare Part A is always free to beneficiaries, Part B medical/doctor insurance and Part D prescription drug coverage are not. And if you’re a higher earner, you’ll pay an additional premium for these two parts of Medicare. This could come into play if you decide to return to work after retiring, but in most cases, it still won’t matter. That’s because the threshold for being a “higher earner,” according to the Social Security Administration, is quite high.
Specifically, you’ll need a modified adjusted gross income of at least $206,000 if you’re a joint filer, or $103,000 for any other filing status. If you’re just picking up extra hours coming out of retirement — or even if you go back to working full time — it would take some effort to get to those levels of income. Nonetheless, some workers might, and it’s something you should know if you’re considering heading back to the workforce.
You May Be Able To Delay Your RMDs
If you have an IRA account, you’ll have to start taking mandatory withdrawals at age 73, even if you are still working. But if you have a 401(k) account and your employer allows it, you can continue to work for them and delay your RMDs until you fully retire, no matter how old you are. In other words, if you have a 401(k) plan with your employer and you go back to work until age 75, you won’t have to take any money out at age 73, or at any age until you finally hang up your work boots once and for all.
You May End Up in a Higher Tax Bracket
If you were living off your investments before you decided to go back to work, you might find yourself in a higher tax bracket once you start earning income again. This can be remedied if you reduce the amount you withdraw from your investment accounts, which you may be able to do if you’re earning enough from your job. But it’s another thing to factor in when you decide to go back to work.
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This article originally appeared on GOBankingRates.com: 6 Ways Going Back To Work Could Impact Your Retirement Portfolio
