Working in retirement can bring many rewarding benefits. From social and personal growth to obvious financial rewards. But do it wrong and your retirement job can cost you plenty. Sadly, making some simple mistakes can have us end up with a retirement job that delivers a dose of regret. Having a little awareness goes a long way in avoiding any retirement job pitfalls. Here are some issues to look out for and plan around so you can walk the retirement job tightrope.

The Benefits of a Retirement Job Are Obvious

I had always planned on living a retire early and often lifestyle. Based on recent studies many people plan on having some type of retirement job. According to a 2017 Gallup poll 75% (3 out of 4) people plan on working in retirement. Part-time is the most popular option from that group. A 2015 AARP study reported “more than one-third of working Americans age 50-64 (37%) anticipate working for pay post retirement from their current career.”

Obviously, earning any income in retirement will at least mean a reduction in the amount we take from our retirement savings. That lets our tax-advantaged retirement accounts continue to grow. Starting a lucrative encore career could even mean adding more money to those retirement savings accounts. We may still be able to add earned income to a Roth IRA even in the year we turn 70 ½ and beyond when RMD is in play.

Working in retirement can be great. But we have to be smart about earning income from a retirement job and do it right or it can cost us way more than it should.

Avoiding Costly Mistakes When Considering A Retirement Job

Everyone’s situation is different. A smart strategy for working in retirement takes looking at how you have your retirement funding and benefits set up and from where it comes from.

I was aware of some of the pitfalls of working in retirement. I planned accordingly based on my retirement income and benefits. Yet I was still surprised at how easy it would be to misstep.

Retiring With A Severance Package

Many companies offer early out packages due to restructuring business direction, location, or personnel. If you began your retirement with a nice send-off in the way of a severance package, then you better pay attention to the fine print in the severance package contract. Many if not all severance packages will have a non-compete clause.

Now What?

If you figured you would accept the severance package, retire, and then take a retirement job in your same field, you best check the contract for any non-compete language. Most dictate a non-compete time frame. It usually starts from the date you left the business dictating that you must not compete in the same line of business. The last thing you want is a costly legal suit. Some states limit the ability of companies to enforce non-compete clauses. If your heart is set on a retirement job within in your same field during the non-compete clause time frame then first seek legal advice.

Increased Taxes and Managing Payment

Just like pre-retirement, the more you earn the bigger your chance of being pushed into a higher tax bracket. Knowing the tax brackets and making sure you either stay just below the next jump or make well enough that you won’t care is a necessary action to take. The challenge a retirement job brings is when your retirement funding is set and can’t be suspended or reduced while you work in retirement. Having a set private or public pension, an annuity, or taking early retirement SEPP 72t payments from your IRA, means that retirement income still comes even though you may now also have a paycheck.

In my case I had a 72t with a 10% Federal Tax withholding assigned to it. That was more than enough taxes withheld when I didn’t work in retirement. Those taxable 72t payments had to continue coming to me while I was working. Even though I filled out my retirement job W4 to withhold taxes as Married but at the higher single rate with Zero dependents, I owed over $1,000 when tax filing time came. That kind of under payment can cause an IRS tax penalty and interest charges.

What to do:  

Keep track of your income and run tax estimates. Make sure that you set aside money for taxes owed later and/or plan on paying additional quarterly estimated taxes if withholding will fall short. Being caught off guard at tax filing time is nobody’s idea of fun. Especially if your savings isn’t easily accessible.

Another consideration is stuffing as much of your retirement job income into tax deferred retirement accounts. Contributing to an IRA and/or 401K can help mitigate any retirement job tax issues. On my early retirement 5 month side-hustle I contributed 80% of my salary to a 401K. This reduced my retirement job’s taxable income for the year. It was set aside for later in retirement when I could easier manage my retirement income and tax rate.

Health Benefits

Medicare:

Once your reach age 65 you have to sign up for Medicare. If you’re already collecting Social Security, whether working in retirement or not, you will be automatically signed up for Medicare Part A. However, you must still sign up for a Part B plan or a 10% penalty may be levied against you. This is easy to overlook if you turn age 65 while working a retirement job that offers health insurance benefits. Start investigating all of the medicare rules before you reach age 65.

ACA (Obamacare):

Many people took advantage of using the ACA so that they could retire early before Medicare kicks in. A lot of retirement jobs do not provide health insurance benefits so the ACA makes it easy to accept these opportunities. If you have a low-cost of living, thus having a low enough income to qualify to receive health insurance subsidies, then pay close attention to the ACA income thresholds. Crossing them may cause your health subsidy being trimmed way back. This could cause you to pay thousands more a year for your health insurance. Take care to analyze the income to cost ratio so that your retirement job doesn’t cost you more than you earn from it.

Employer Retirement Healthcare:

If you retired with a medical benefit from your employer then pay close attention to the fine print and review the plan rules yearly. Things can change and you can run afoul of the rules causing you lose your hard-won retirement healthcare benefit.

After working over 30 years in my first career and company I had earned a retirement health benefit where I was allowed to buy into the employee health plan. With my first retirement job came a low-cost employee health insurance benefit that was 75% less than my retirement health insurance premium. I suspended my retirement healthcare as allowed and went on the retirement job’s health plan for the year.

The next year the retirement health benefit rules changed and benefit suspension was no longer supported. It became a “use it or lose it” retirement healthcare policy going forward. If I had missed the fine print on the end of year healthcare election documents I could have been dropped. Losing a 30 year employment benefit and once again being forced to work for healthcare or thrown to the expensive individual market, praying the ACA stays intact until I turn age 65, could have been a costly mistake.  

Social Security

If you take on a retirement job after you have started receiving Social Security then there are two separate issues that can come into play.

• Having your Social Security payment reduced
• Causing your Social Security to be taxable

Reduced Social Security Payment:

If you started Social Security before your full retirement age and take on a retirement job making more than the yearly earnings limit, Social Security will reduce your benefit payment. The reduction is $1 for every $2 earned above the annual limit. The 2018 earnings limit is only $17,040. For the year you reach full retirement age, the reduction is $1 for every $3 earned above the annual limit but it is only applied to earnings before your birthday. The earnings limit is also set higher at $45,360. There is no Social Security limit on earnings for working in retirement after your full retirement age.

Note: Reduced Social Security benefit amounts are merely delayed. Reduced amounts are added back to your benefit and monthly payments once you reach full retirement age.

Social Security Becoming Taxable:

Regardless of your age, a chunk of your Social Security can become taxable. According to the Social Security Administration:

file a federal tax return as an “individual” and your combined income* is

• between $25,000 and $34,000, you may have to pay income tax on up to 50 percent of your benefits.

• more than $34,000, up to 85 percent of your benefits may be taxable.

file a joint return, and you and your spouse have a combined income* that is

• between $32,000 and $44,000, you may have to pay income tax on up to 50 percent of your benefits
• more than $44,000, up to 85 percent of your benefits may be taxable.

*Combined income is calculated the following way- AGI (wages, self-employment income, interest, dividends, IRA/401K withdrawals, taxable pension/annuity, etc.) + Non-taxable interest. (interest excluded from taxes on your federal return but considered as part of the taxable Social Security threshold calculation) + ½ of your Social Security benefits. (individual, or joint-you and spouse combined).

If you are considering a retirement job and haven’t already claimed Social Security, you may want to delay beginning your benefits, if you can afford to. That way you will earn a higher benefit amount later. You also won’t have to deal with retirement job related Social Security payment reduction and/or taxable Social Security thresholds.

Be aware of these thresholds if you have already begun your Social Security benefits. That way you can calculate the impacts and the actions you can take to reduce unnecessary cost and make your retirement job worth doing.

Retirement Job Trap

One of the easiest retirement job mistakes to make is finding yourself trapped in the wrong job. This is a costly mistake because we end up spending our time doing something we are not happily doing. Choose your retirement opportunity wisely. We all only have so much time left to spend so we shouldn’t be wasteful with it. Even a carefully chosen job can later have run its course. It’s far too easy to become trapped because of our old pre-retirement work habits of business obligation and loyalty.

I certainly experienced that in my retirement job endeavours. The longer I was there the more the business added to my duties beyond my desired working in retirement happiness thresholds.

Be sure to check your retirement job happiness account frequently. If you find it being depleted then your retirement job is costing you way too much. Make the necessary adjustments to your working arrangement, retire again and find another retirement job, or re-enter a happiness based work-free phase of retirement.