Financial Reports and Analysis

Rethinking Retirement — Why Returning to Work is the New Norm

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by Alli Thomas

Apr 24, 2018

Athletes do it. Rock stars do it. And now, more Americans are coming out of retirement and heading back to the workforce. A 2017 study by the non-profit RAND Corporation revealed that close to 40% of workers over age 65 had previously retired. In February 2018, the Bureau of Labor Statistics reported that the jobless rate for people over age 55 is 3.2%—nearly one full percentage point lower than the total national unemployment rate. Concerns about outliving savings top the list of reasons retirees decide to reenter the working world.

A recent study by Bankrate.com showed that nearly two-thirds of Americans have little, or no, retirement savings. Going back to work is a logical way to boost savings for later in retirement. Another reason? Traditional defined-benefit pension plans have all but disappeared, and workers are staying put longer to make up for that loss. Other former retirees say they missed several key aspects of working: a sense of purpose that comes from having a job, the mental stimulation it provides and socializing with coworkers. But what are the financial implications of going back to work in the so-called golden years? 

Social Security

Your Social Security benefits may be reduced if you return to the workforce, depending on your age. Full retirement age (FRA) for people born in 1943 or later is between 66 and 67. If you haven’t attained FRA when you go back to work, $1 in benefits will be deducted for every $2 you earn over the annual limit ($17,040 in 2018). If you go back to work in the year you reach FRA, $1 in benefits will be deducted for every $3 you earn above a higher limit ($45,360 in 2018)—but only counting earnings before your birthday month. If you go back to work starting in the month you attain FRA, your benefits are not impacted, with no cap on your income. Learn more about your estimated benefits reduction calculation here.

Medicare

Most retirees cite healthcare costs as their number-one financial concern, and with good reason. A study by Fidelity Consulting reported that healthcare costs for a 65-year old couple retiring in 2017 are estimated to be $275,000 over the entire course of retirement, and that figure excludes long-term care expenses. Employer-sponsored health coverage can be a good incentive to get back into the 9-to-5 routine.  If you’re 65 or better and returning to work, check with your human-resources department about how its health-insurance coverage would work with your Medicare coverage. You can also check out this guide from Medicare for more information.

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Retirement Savings

If you have a pension plan, contact the plan provider and the benefits department at your new employer to see if re-entering the workforce will affect your pension payments.  If you have a traditional IRA, you’ll still have to take an annual required minimum distribution (RMD) after you reach age 70 ½, even if you are still working. RMDs do not apply to Roth IRAs.

You may want to consider converting your traditional IRA to a Roth IRA to avoid the RMD requirement. You will have to pay taxes when you convert; however, it can be done in small amounts to spread out your tax liability over the course of years. If you have a 401(k) plan and continue working past age 70 ½ (assuming you are not a 5%-or-more owner of your company), you will likely be allowed to postpone RMDs from your current employer-sponsored 401(k) plan until April 1 of the year following the year in which you permanently retire. But you may still be subject to RMD rules for 401(k) plans from former jobs. Contact the plan administrators for both your current and former employers for more information. You can read more about RMD requirements here. In most cases, as long as you’re working, you can keep socking away money in your 401(k) regardless of your age.

If you’re under age 70 ½ and under certain income limits, you can also contribute to a traditional IRA or a Roth IRA. The tax deductibility of IRA contributions depends on how much you earn and whether you are actively contributing to an employer-sponsored retirement plan. Roth IRAs have no age limit for contributions; although there are income restrictions. 

(Re)balancing Act

So you’ve decided to suit up and get back into the game. Should you change your portfolio allocations now that you’re on the payroll again? It depends on a few factors, including your time horizon, your risk tolerance and how much you’ve already saved.

We can help you map out your next steps if you’re thinking about rejoining the working world! Leave a comment below, or send a confidential message to one of our experienced financial professionals by clicking “Ask a question” above.

Alli Thomas

Alli Thomas has worked in the financial services industry for nearly 20 years, with a focus on retirement-related investing. She began her career as a FINRA-licensed participant-services call-center associate at Vanguard, and then moved to Principal Financial Group, where she worked closely with employers, assisting with retirement plan set-up and design, selecting appropriate plan investment offerings, and maximizing employee participation through targeted education campaigns and enrollment meetings. Alli has also worked as a qualified 401(k) administrator and registered investment advisor for several small investment firms. She now writes about all things investment- and finance-related, leveraging her extensive experience and passion for retirement planning to help investors make well-informed financial decisions.

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