Working and collecting Social Security is a taxing problem. “Why should I work if I’m going to lose benefits to taxes, or even get my benefits reduced?” The rules are complex. However, they’re important because working during retirement is becoming more and more a trend. We’ll talk about the impacts of drawing a paycheck during retirement. However, first, let’s review how retirement is being redefined.
What do you consider to be normal retirement age? Somewhere around age 65? And there might be a few groaning “Never.” It’s generally labeled as when Social Security retirement benefits commence and essentially an artificial goal line. There was a time when people spoke in hushed terms as if working later was a bad thing. However, there are several reasons why Americans work past “retirement age.”
Supplement retirement income. We need to fund longer retirements and the responsibility has shifted to us. AARP’s Life Reimagined Survey of people 35 years-plus expect to work beyond age 65. It’s not that they want to get work forever – 87 percent say they want to retire someday but they don’t feel they will be able to stop. Some are non-financial. However, 70 million Americans suffer from sleepless nights and the primary culprit is money worries. According a CreditCards.com survey, 68 percent of women and 56 percent of men lose sleep occasionally. Retirement tops the list (49%) with “haven’t saved enough.” It’s the biggest purchase in life – 2.5 times the average price of a home – yet 80 percent don’t know what retirement will cost. Other concerns include education expenses (30%), health care (29%), mortgage/rent (26%) and credit card debt (22%).
The Merrill Lynch and Age Wave Retirement Study illustrates differing expectations by age groups. Three sources of retirement income are Government (SS), Employer pensions and Personal sources (savings/investments, employment and family). The Silent Generation (born 1925 – 45) counts on roughly half of their income from SS, and roughly a quarter each from the other two. Younger and younger generations expect less from Government and Employer, and rely more on Personal – Millennials expect 65% of their income to come from personal sources). And there’s a growing expectation for employment income – Millennials expect a quarter of their retirement funding to come from continued work.
Motivation, engagement and sense of purpose. Satchel Paige is one of the great baseball players. He took the mound for the last time at age 60, and pitched a three inning shutout for the KC Athletics. Among his many quotes is “How old would you be if you didn’t know how old you were?” And I recall a discussion in Mitch Anthony’s “The New Retirementality” asking “how many 25-year olds does it take to replace someone with forty years of work experience, insights and relationships?” Retirees work for many non-financial reasons. Age Wave/Merrill studies categorize four types of retirees: Driven Achievers (15%) keep right on working and accomplishing, Caring Contributors (33%) find ways to give back, often working for nonprofits, Life Balancers (24%) work largely for friendships and social connections, and Earnest Earners (28%) keep working primarily to pay the bills.
Working during retirement has two key drawbacks. First, if your start drawing SS benefits early your benefits can be reduced (1) for starting early (up to 20% to 30% reduction versus waiting for full retirement age 65 – 67) and (2) if you work (SS benefits reduced $1 for every $2 your earnings exceed $16,920 if you’re under the FRA, $1 for every $3 earnings exceed $44,880 in year you reach FRA, and no earnings limit after FRA). Second, SS benefits can be taxable depending on your income. If you’re married filing jointly and your “Provisional Income” (AGI excluding SS + tax-exempt interest + 50% of SS benefits) is under $32,000, then none of your SS is taxable. Between $32,000 and $44,000, then up to 50% is taxable. And over $44,000, then 85% is taxable.
However, do consider working despite the hits. “Don’t let the tax tail wag the dog” goes the saying. A
tax attorney explained the tax code to me on a golf course… “Brian, if I offered you this crisp $100 bill on the condition you had to give me $50 back, would you take it?” Wouldn’t you? And your future SS benefits may increase from the additional earnings. And of course, don’t take this as gospel. I don’t know your situation, and advise you to seek expert tax advice by your CPA and talk with Social Security.
So if money can’t buy you happiness, then possibly it buys you a good night’s sleep. May you plan and rest well.