As more baby boomers reach the typical retirement age in good health, the very notion of a “typical retirement age” is becoming harder to pin down. In fact, the percentage of those aged 65 and older in the workforce has grown by 117% over the last two decades, a trend that’s set to continue for the foreseeable future.
While some seniors may opt to stay in their primary roles, others see their 60s and 70s as an opportunity to start a second act in a brand new career or contribute on their terms to the side-gig economy. In addition to personal fulfillment, an encore career can offer you financial flexibility and employer-sponsored benefits. On the other hand, there are some important tax and other financial considerations to understand before taking this route. Here’s what you need to know if you’re thinking of launching a “post-retirement” career.
Longevity and the need for additional resources
Between medical advances and healthier lifestyle choices, longevity has been on a steady increase in recent decades. In 1950, the average retirement period for a 65-year-old was eight years; today it’s more than 20 years.
This means that the demands on an individual or couple’s savings are greater than ever before. While everyone’s situation is different, you can expect to need about 70% to 80% of your working income to cover each year of retirement, and Social Security is only likely to fund about 40% of that. While high-net-worth individuals and diligent savers may have what they need to cover a multi-decade retirement, not everyone is so adequately prepared.
The positives – financial and otherwise
Working for even a few extra years can provide the income needed to cover day-to-day living expenses, build up your savings, provide medical coverage, and pay down outstanding debt. It can also allow you to spend a bit more freely on things like travel and leisure.
Critically, working longer can help delay the need to dip into your retirement savings accounts and to start accessing federal benefits. While you can’t keep funds in your 401(k) or IRA forever, you have until the age of 70 ½ to begin taking required minimum distributions from those accounts. So having working income can help you preserve your retirement assets until you have to start drawing them down.
A similar principle applies to collecting your Social Security benefit. While you can begin receiving Social Security payments at 62, you’re only eligible to receive 100% of the benefit amount to which you are entitled at what’s called your “full retirement age.” This age depends on when you were born: it is currently set at age 67 for those born in 1960 or later, and at 65 for those born in 1937 or earlier – with specific ages in between for those born in the intervening years.
Simply put, if you begin collecting Social Security before your full retirement age, your benefit amount will be reduced; if you wait until that age, you’ll get the full amount. But you can collect even more if you can hold off even longer, thanks to “delayed retirement credits.” The size of the credit increases for each year after your full retirement age and then levels off at age 70.
These credits can really add up; according to the Social Security Administration, “If your full retirement age is 66 and 2 months and you wait until age 70, your benefit will be 130.67% of your full retirement age benefit.” So, if the income from an encore career allows you to delay your collection of Social Security benefits, you’ll have an even greater safety net as you move into your later years.
Beyond the financial reasons, there are also a lot of other advantages to staying in the workforce longer. A job can give you a sense of purpose and responsibility, provides another avenue for socialization and may allow you to pursue a personal passion that was not a part of your primary career.
The negatives
While there are plenty of positives associated with an encore career, there are some potential consequences to keep in mind too. Social Security payments, 401(k) and IRA distributions and, of course, your paycheck all qualify as income, so working while accessing your benefits or savings can significantly increase your tax bill. Again, while you can delay your collection of Social Security payments, you must begin taking distributions from your retirement accounts by age 70 ½.
Moreover, people with a higher income may have to pay more for their Medicare Part B (medical insurance) premium. While you may be able to use an employer-sponsored health care plan if you stay in the workforce, keep in mind that you could be subject of a hefty penalty if you don’t sign up for Medicare Part B as soon as you become eligible.
The big picture
Ultimately, the choice to continue working past your mid-60s is a very personal one. A second-act career can offer financial flexibility and peace of mind, the chance to pursue a passion project and the opportunity to forge meaningful social connections. At the same time, the extra income does have implications for your tax liability and Medicare costs. Carefully considering various income scenarios, and ideally discussing them with a financial professional, can help you determine whether launching a new career in retirement is the best path forward for you.