What is delayed retirement?
If you cannot afford to retire or if you still enjoy working, you might want to consider delaying retirement. This could mean that you continue to work full-time or that you work part-time, for either the same or a different employer, to supplement your retirement income. It could also mean that you start up your own business venture. In any case, a delayed retirement involves continuing to generate at least some employment earnings as an alternative to full-time retirement leisure mode.
Why work during retirement?
Obviously, if you delay retirement, or work part-time during retirement, you’ll be earning money and relying less on your retirement savings — leaving more to grow for the future and making your savings last longer.
If you continue to work, you may also have access to affordable health care, as more and more employers begin offering this important benefit to part-time employees.
But there are also non-economic reasons for working during retirement. Many retirees work for personal fulfillment — to stay mentally and physically active, to enjoy the social benefits of working, and to try their hand at something new — the reasons are as varied as the number of retirees.
Social Security benefits
You can delay receiving Social Security benefits past your full retirement age. If you do so, your Social Security benefits may increase for two reasons. First, each additional year that you work adds another year of earnings to your Social Security record, potentially resulting in higher retirement benefits. Second, you’ll receive delayed retirement credits that will increase your benefit by a certain percentage for each month you delay retirement (up to age 70). The percentage increase varies, depending upon the year you were born. For those born in 1943 or later, the yearly rate of increase is 8%.
Hal works at the local nuclear power plant. He wants to work past the normal retirement age and delay his Social Security retirement benefits. Since Hal was born in 1944, he is eligible for a delayed retirement credit of 8% for each year that he works past the normal retirement age, up to age 70.
Although you can delay your Social Security retirement benefits, you still have to sign up for Medicare once you reach age 65.
If you work after you start receiving Social Security retirement benefits, your earnings may affect the amount of your benefit check. Your monthly benefit is based on your lifetime earnings. When you become entitled to retirement benefits at age 62, the Social Security Administration calculates your primary insurance amount (PIA), upon which your retirement benefit will be based. Your PIA is recalculated annually if you have any new earnings that might increase your benefit. So if you continue to work after you start receiving retirement benefits, these earnings may increase your PIA and thus your future Social Security retirement benefit.
But working may also cause a reduction in your current benefit. If you’ve reached full retirement age (65 to 67, depending on when you were born), you don’t need to worry about this — you can earn as much as you want without affecting your Social Security retirement benefit.
But if you haven’t yet reached full retirement age, $1 in benefits will be withheld for every $2 you earn over the annual earnings limit. A special rule applies in your first year of Social Security retirement — you’ll get your full benefit for any month you earn less than one-twelfth of the annual earnings limit, regardless of how much you earn during the entire year. A higher earnings limit applies in the year you reach full retirement age. If you earn more than this higher limit, $1 in benefits will be withheld for every $3 you earn over that amount, until the month you reach full retirement age — then you’ll get your full benefit no matter how much you earn. Visit the Social Security web site (ssa.gov) to review the earnings limits for the current year. (If your current benefit is reduced because of excess earnings, you may be entitled to an upward adjustment in your benefit once you reach full retirement age.)
Not all income reduces your Social Security benefit. In general, Social Security only takes into account wages you’ve earned as an employee, net earnings from self-employment and other types of work-related income, such as bonuses, commissions, and fees. Pensions, annuities, IRA distributions, and investment income won’t reduce your benefit.
Also, keep in mind that working may enable you to put off receiving your Social Security benefit until a later date. In general, the later you begin receiving benefit payments, the greater your benefit will be. Whether delaying the start of Social Security benefits is the right decision for you, however, depends on your personal circumstances.
One last important point to consider: In general, your Social Security benefit won’t be subject to federal income tax if that’s the only income you receive during the year. But if you work during retirement (or receive any other taxable income or tax-exempt interest), a portion of your benefit may become taxable. IRS Publication 915 has a worksheet that can help you determine whether any part of your Social Security benefit will be subject to federal income tax.
The longer you delay retirement, the longer you can contribute to your IRAs. If you have a traditional IRA, you have to start taking required minimum distributions once you reach age 72. If you fail to take the minimum distribution, the IRS will assess a 50% penalty on the amount that should have been distributed. If you have money in your current employer’s retirement plan, as long as you are not a more than 5% owner, the required minimum distribution rules do not apply until you reach age 72 or retire, whichever occurs later. If you have a Roth IRA, you don’t have to take withdrawals at any age.
Employer-sponsored pension plans
If you continue to work past your normal retirement date for the same employer (or if you retire and then return to work for that employer), and you participate in a traditional (defined benefit) pension plan, you need to understand how your pension benefit will be impacted by your delayed retirement.
If you retire, and go to work for a new employer, your pension benefit won’t be impacted at all — you can work, receive a salary from your new employer, and also receive your pension benefit from your original employer.
In general, you’ll continue to accrue benefits during your delayed retirement. However, some plans have a limit on the number of years that count towards your pension. If you’ve reached that limit, continuing to work generally won’t increase your pension benefit unless your plan calculates benefits using your final average pay, and your pay continues to increase.
If your pension plan calculates benefits using final average pay, be sure to discuss with your plan administrator how your particular benefit might be affected if you decide to continue to work on a part-time basis. In some cases, reducing your hours at the end of your career could reduce your final average pay, resulting in a smaller benefit than you might otherwise have received. Also, note that some plans require that you work at least 1,000 hours in order to get credit for a year of service.
Some plans will allow you to start receiving your pension benefit once you reach the plan’s normal retirement age, even if you continue to work. Other plans will suspend your pension benefit if you work beyond your normal retirement date, but will actuarially increase your payment when benefits resume to account for the period of time benefits were suspended. Still other plans will suspend your benefit for any month you work more than 40 hours, and will not provide any actuarial increase — in effect, you’ll forfeit your benefit for any month you work more than 40 hours.
Some plans provide yet another option — “phased retirement.” This type of program allows you to continue to work on a part-time basis while accessing all or part of your pension benefit. Federal law encourages these phased retirement programs by allowing pension plans to start paying benefits once you reach age 62, even if you’re still working and haven’t yet reached the plan’s normal retirement age.
401(k) and other employer-sponsored retirement plans
If you participate in a 401(k), profit-sharing, ESOP, 403(b), 457(b) or similar plan sponsored by your employer, you’ll be able to continue to contribute to the plan, and receive any applicable employer contribution, if you continue to work beyond your plan’s normal retirement age.
Whether you’ll be able to access your funds while you’re employed depends on the terms of the plan. Some plans allow you to take distributions once you turn age 59½, or once you reach normal retirement age, or if you experience a hardship. Other plans require that you terminate employment before you’re eligible to receive a distribution. Check with your plan administrator to find out your plan’s distribution options if you think you may need to access your funds while you’re still employed. Your distribution options will also be spelled out in your plan’s summary plan description (SPD).
If you continue working past age 72, you won’t need to begin taking required minimum distributions (RMDs) from your plan until April 1 of the calendar year following the calendar year in which you retire (if the retirement plan allows this and you own 5% or less of the company).
Many individuals work during retirement to keep their medical coverage. If working during retirement for you means moving from full-time to part-time, it’s important that you fully understand how that decision will impact your medical benefits.
Some employers, especially those with phased retirement programs, offer medical coverage to part-time employees. But other employers don’t, or require that you work a minimum number of hours to be eligible for benefits. If your employer doesn’t offer medical benefits to part-time employees, you’ll need to look for coverage elsewhere. If you’re married, the obvious option is coverage under your spouse’s health plan, if your spouse works and has coverage available. If not, you may be eligible for COBRA coverage.
COBRA is a federal law that allows you to continue receiving medical benefits under your employer’s plan for some period of time, usually 18 months, after a qualifying event (including loss of coverage due to a reduction in hours). But it’s expensive — you typically have to pay the full premium yourself, plus a 2% administrative fee. (COBRA doesn’t apply to employers who have fewer than 20 employees.) Another option is private health insurance, but that will likely be very expensive. You also may shop for and purchase an individual health insurance policy through either a state-based or federal health insurance Exchange Marketplace.
Of course, once you turn 65, you’ll be eligible for Medicare. You’ll want to contact the Social Security Administration approximately three months before your 65th birthday to discuss your options. If you have private or employer-sponsored health insurance, talk to your benefits administrator or insurance representative before enrolling in Medicare to find out how your current health insurance fits in with Medicare.
We love to help you retire better. Check out our many Social Security planning options. Also, we love to keep in touch with our newsletter; click here to sign up.
Broadridge Investor Communication Solutions, Inc. prepared this material for use by Social Security Benefit Planners, LLC.
Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on individual circumstances. Social Security Benefit Planners, LLC provide these materials for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.