Kiplinger’s article, “Working Part-Time in Retirement Can Be Tricky,” notes that some folks’ retirement dreams entail having the time to do what they want without work pressures. However, for others, working part-time—either by choice or out of necessity—is a critical part of their retirement picture. Part-time employment in retirement can supplement cash flow, keep employee benefits and help keep one mentally and physically challenged.
The good thing about working part-time is that it’s very healthy from a financial-planning standpoint. Every year you work improves your earnings history, increasing the amount of Social Security you get. It can also let you to delay taking Social Security benefits, which increase by 8% every year past your full retirement age, up to age 70. Your pay from a part-time job may also mean you can wait to spend from your retirement accounts, giving them more time to grow. Finally, part-time work may let you keep employer benefits, like health insurance and contributions to tax-efficient employer sponsored plans such as 401(k)s.
As an added bonus, any funds in your current employer’s plan will avoid required minimum distributions (RMDs) at age 70½ and later—provided you stay actively employed. While funds in an inactive 401(k) from a former employer would be subject to RMDs, this can be avoided if the inactive accounts are consolidated with your current employer's 401(k) account and if your employer accepts rollovers.
Now the bad news. Working part-time in retirement can complicate your finances. If you're already taking Social Security, your benefits are taxable based on other income sources like your pay, dividends, capital gains, retirement account distributions, and 50% of your Social Security benefits. Your part-time job means more income, but it may adversely affect your Social Security benefit.
Your part-time income may also put you in a higher tax bracket for income taxes, as well as for capital gains taxes. If your part-time income puts you at or above the 25% income tax bracket, you may be subject to a 15% or 20% capital gains tax rate.
Consider how working part-time in retirement would impact your ability to achieve an ideal retirement lifestyle. Work with a competent financial planner to explore your options.
Reference: Kiplinger (August 2017) “Working Part-Time in Retirement Can Be Tricky”
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