Retirement has undergone a bit of a transformation in recent years. More retirees are choosing to continue working after retirement, redefining the traditional notion of "retirement." As a CERTIFIED FINANCIAL PLANNER™ with extensive experience in crafting retirement plans, I've witnessed a definite shift in this direction. In this article, we will explore some of the factors to consider when working after retirement and look at a real client example of how it impacts their retirement projections.
The Rise of Working After Retirement: In a recent retirement survey, a staggering 73% of current workers expressed their intention to work for pay after retiring. This shift can be attributed to a variety of factors, one of which being the robust labor market. There continues to be demand for skilled workers, making it more feasible for retirees to find suitable employment opportunities—a phenomenon rarely seen two decades ago. Moreover, depending on your area of expertise, some industries are showing a much higher demand for workers than others, some examples include healthcare, technology and financial professionals to list a few.
While the ongoing demand for workers might lead some to continue working after retirement, others may want to continue working a lighter workload after retirement to keep them engaged and productive in society. For this group of individuals, the social aspect of working may be just as beneficial as the financial aspect. Let's explore how working after retirement can benefit your financial security and some factors to consider as it relates to social security benefits.
How Working Affects Social Security Benefits: For those considering working post-retirement, it's crucial to understand how this choice can impact their Social Security benefits. The intricacies of this relationship are governed by three key concepts: full retirement age, the earnings test, and taxable benefits.
Full Retirement Age: Officially, there is no one-size-fits-all retirement date. The Social Security Administration allows individuals to commence receiving benefits as early as age 62 or delay until age 70. Your "full retirement age" is the point at which you become eligible to receive 100% of your Social Security benefits. For those born in 1960 or later, full retirement age is 67. For people born before 1960, the full retirement age is lower, with gradual increases for those born between 1938 and 1959.
The Earnings Test: Electing to receive Social Security benefits before reaching full retirement age triggers the earnings test. Benefits may be subject to withholding if your earnings exceed a certain income threshold while you are still below your full retirement age. There are two distinct exemption amounts in play: a lower limit ($22,320 for 2024) for the years leading up to full retirement age and an upper limit ($59,520 for 2024) for the year in which you attain full retirement age. As it is currently published on the SSA.GOV website, there is a $1 reduction in benefits for every $2 in earnings above the lower limit and a $1 dollar reduction in benefits for every $3 in earnings over the upper limit. These exempt amounts generally undergo annual inflation adjustments as well.
Any benefits that are withheld while you are still employed are not forfeited indefinitely. When you reach your full retirement age, your monthly benefit will receive a permanent increase to compensate for the months during which benefits were withheld.
Taxable Benefits: Once you reach full retirement age, Social Security benefits will not be reduced, regardless of your earnings. However, it's important to note that Social Security benefits are subject to taxation. For instance, if you file a joint return with your spouse and both of you are past full retirement age, you may have to pay income tax on a portion of your benefits, depending on your combined income.
Part-Time Work and the Impact to Retirement Monte Carlo Projections: Let’s look at a real-life scenario below:
The retirement projections presented below are based on a real-life case of a recent retiree contemplating part-time work after retirement. The data results are based on a Monte Carlo simulation, which runs 1,000 random market return scenarios to estimate the probability of retirement success (the probability of living to age 95 without running out of money). With an 85% probability of success, this individual's retirement plan appears solid, indicating a good chance of financial stability until the age of 95. Furthermore, it shows a median asset value of $850,398 at the end of the plan or age 95.
Now, let's explore an alternative scenario: the same individual chooses to work part-time for the next four years, starting in 2024, earning $30,000 per year with a 3% annual increase. In this practical example, introducing part-time income strengthens the retirement probability success rate and end of plan asset values.
Conclusion: Working after retirement is a dynamic and viable option for many individuals. It is not for everyone, but if you are willing to do it, it may increase your probability of a successful retirement. However, it is important to be aware of how this choice can impact your Social Security benefits. Understanding the complex relationship between working and Social Security is a key component of effective retirement planning. By optimizing your income sources, including Social Security, you can ensure a financially secure and fulfilling retirement. For personalized guidance on your retirement strategy, it's advisable to consult with a financial or tax professional about your own unique situation.
About Rocklin Senavinin, CFP®
With over 20 years of experience in the financial planning industry, Roc has dedicated his career to helping individuals live comfortably in retirement and enjoy the assets they have spent their career building. He is co-founder of Fiduciary Wealth Management, a fee-only registered investment advisory firm in Little Rock, Arkansas. As a CERTIFIED FINANCIAL PLANNER™ professional, he has advanced training in the holistic process of creating a personal financial plan that addresses a person’s comprehensive needs for the short and long term. To learn more, connect with Roc on LinkedIn or visit www.fidwm.com. If you have questions, feel free to schedule a phone call using this link.
The views expressed represent the opinions of Fiduciary Wealth Management, LLC and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial, or legal advice or service to any person.
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