What Retirees Need to Consider Before Going Back to Work

If you’ve retired from your job but find yourself considering re-entering the workforce, you’re not alone.

Some people return to work because of financial issues.

Others end their retirement because they miss the stimulation that working outside the home provides.

Either way, retirees returning to the workforce is a common phenomenon. 

However, it’s important to understand how returning to work can affect your finances.

It can significantly impact your taxes, Social Security benefits, and even your Medicare coverage. Use this retiree back-to-work guide to figure out if returning to the workforce is right for you.

5 Retiree Back-to-Work Considerations

If you’re thinking about returning to work, there are many benefits to consider. 

• Financial comfort: Working longer can help you save more money in your retirement nest egg, giving you a more secure future. 
• Increased Social Security benefits: The longer you wait to receive Social Security benefits, up to age 70, the bigger your monthly Social Security check will be. 
• Health insurance: Medicare often has costly out-of-pocket fees and coverage gaps. Returning to work means you may be eligible for employer-sponsored plans that can help you save. 
• Social benefits: Working is a great way to stay engaged with the community, boosting your mental and physical health. 

Before deciding to return to work as a retiree, it’s important to understand how re-entering the workforce would affect your finances.

There are five major factors to keep in mind:

1. Social Security benefits

Depending on your age, returning to work could cause your Social Security benefits to be reduced.

• The Social Security Administration (SSA) defines full retirement age as between 66 and 67 years old.

If you’re not yet at the full retirement age and start working again, your benefits will likely decrease. 

According to AARP, going back to work before your full retirement age will result in your benefits being deducted by $1 for every $3 you earn above the annual limit. As of 2021, that annual limit is $18,960.  

For example, let’s say you go back to work before you reach your full retirement age and take on a full-time position that pays a salary of $40,000 per year. Your income is $21,040 over the annual limit, so your Social Security benefits would be reduced by $7,013. 

The exception:

If you have already reached the full retirement age, your benefits are no longer reduced, regardless of how much money you actually make.

2. Medicare coverage

If you return to work, you may be eligible for health insurance through your new employer.

If you’re 65 or older and are already covered by Medicare, it’s a good idea to talk to your employer’s human resources department to find out how their insurance coverage works with Medicare. 

In many cases, your new group insurance plan will pay first. Then, your Medicare benefits will kick in.

However, how it works is typically dependent on the size of your company and the specific insurance benefits the plan offers.

If you do have employer-offered insurance, make sure you pay attention to rules surrounding health savings accounts (HSAs). Once you enroll in Medicare, you’re unable to contribute to HSAs. To avoid paying costly penalties to the IRS, make sure you stop all HSA contributions. 

3. Income taxes

If you return to work and start earning a salary, you may be subject to additional income taxes. 

As your modified adjusted gross income (MAGI) increases, a larger percentage of your Social Security benefits are taxed.

According to the SSA, up to 85 percent of your Social Security benefits may be subject to income tax, depending on how much you earn each year. 

Additionally, you may have to pay state income taxes on your Social Security benefits. There are 13 states that tax Social Security benefits:

• Colorado
• Connecticut
• Kansas
• Minnesota
• Missouri
• Montana
• Nebraska
• New Mexico
• North Dakota
• Rhode Island
• Utah
• Vermont
• West Virginia

Talk to a tax professional to see what the tax implications are in your state.

4. Work-related costs

While returning to work may sound like a great way to improve your finances, it may not be as beneficial as you expect.

If you have to spend a substantial amount of money to pay for a car and gas to commute to work or for a professional wardrobe, that number can grow even larger. 

With higher monthly expenses, you’ll see less of a positive impact to your bank account. 

So:

Before returning to work, make sure you consider the cost of entering the workforce again and do the math to ensure it’s financially worth it. 

5. Retirement savings

If you go back to work, you can usually contribute to employer-offered retirement accounts, such as a 401(k). That’s true no matter how old you actually are.

The best news:

If you’re under the age of 70½, and are within the income limits, you can also contribute to a traditional IRA or Roth IRA.  

The U.S. Government Accountability Office found that 48 percent of households headed by someone aged 55 or over had no retirement savings at all, and an even larger percentage had an inadequate nest egg for retirement. 

Returning to work allows you to build up your savings for a longer period of time, giving you more financial security. 

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What to Do Before Returning to Work

If you think that returning to work is right for you, make sure you follow these five steps before reentering the workforce to ensure you’re making a sound decision: 

1. Meet with a financial advisor

If you’re thinking of returning to the workforce, it’s a good idea to meet with a financial advisor to review your finances.

Look:

A good financial advisor can help you assess your financial picture, explain to you the impact it will have on your Social Security benefits and retirement accounts, and assist you in deciding whether or not it’s a smart idea for you.

And, if you have any questions or need advice, a financial advisor can answer you and give you peace of mind.

2. Discuss your situation with a tax professional

Going back to work can have a significant impact on your federal and state income taxes.

Before accepting a new position, talk with a tax professional like a certified public accountant to discuss the tax implications of returning to work.

3. Consider your healthcare needs

If you have ongoing medical expenses, such as expensive prescription drugs or regular treatments, returning to work can be a smart idea.

When you’re retired and on Medicare, you may be on the hook for expensive out-of-pocket fees.

Some employer-offered plans may have lower fees than Medicare and can cover any gaps in your coverage, reducing your costs and helping you save money.

Before taking on a new job, make sure you compare the cost of your Medicare plan and an employer-offered insurance plan to see how much you could save.

4. Create a budget

When you go back to work, you’ll incur a number of new expenses you wouldn’t face if you remained retired.

To keep your finances in check and to prevent unnecessary spending, come up with a comprehensive budget that accounts for all of those work-related expenses.

Make sure you include:

• Transportation, such as a car payment, fuel costs, car insurance, or the cost of public transportation fares
• Professional clothing, including special shoes, suits, or accessories
• Food, including lunches, coffees, or snacks you consume while on the job
• Daycare or assisted living fees for children or dependents
• Petcare for your dog or cat if your work will take you away from home

5. Consider alternative work options

If you’re thinking of going back to work, but are deterred by the idea of working the same old 9-to-5 that you’ve worked for 30 years (or more!), consider other alternatives.

You could switch to a whole new career path, take a job in a different industry, or even pursue part-time work.

Re-entering the Workforce

If you retired but are second-guessing your choice, you should know that thousands of people reenter the workforce after retirement each year.

Whether you go back to work because you miss the hustle and bustle of an office or because your retirement savings are a bit lean, keeping retiree back to work considerations in mind can help you make an informed choice that works for you and your family.