How Post-Retirement Jobs can Affect Social Security and Medicare Benefits

Advisor July 18, 2019

Americans aren’t saving enough for old age which is slowly turning retirement into a distant dream. There are an increasing number of older adults who are quitting their 40-hour-per-week jobs and taking up part-time work to help pay the bills after retirement.

According to the Bureau of Labor Statistics, more than 54 per cent of retirees from the age of 60 to 64 were in the workforce in 2017

Working After Retirement

Julie Virta, who works as senior financial advisor at Vanguard, says that there is a rising trend among retirees to take up a part-time job after a few years of retiring from their long-term career. She says that there are people at the age of 70 and above who are still working because being useful to the society brings them a sense of joy and self-worth.

According to the Bureau of Labor Statistics, more than 54 per cent of retirees from the age of 60 to 64 were in the workforce in 2017 and almost one-third of the population between the ages 65 and 69 were working part-time jobs last year. So whether you’re returning to work for a sense of fulfillment or out of financial necessity, it is important to know how your port-retirement income can impact other aspects of your financial life.

Certified financial planner DeDe Jones, who serves as the managing director of Innovative Financial, says that there are a number of reasons why people choose to return to work after retirement, but it’s important to know what to expect once you reenter the job market.

Effect on Social Security

Social security is one of the biggest aspects of your retirement plans. The full retirement age to start receiving social security benefits is 62 years, as defined by the law. But if your decide to use your social security money before reaching the age of 62 and have returned to work, the additional income from your part-time job could slash the social security benefits.

Most experts advise retirees to resist tapping into their social security for as long as possible, because the more you delay it, the more benefits you claim once you start receiving the monthly retirement check. If you start receiving the social security right after hitting the age of 62, it could limit the amount of money you can make if you decide to look for a part-time job. The yearly cap, as off 2018, is $17,040, and any amount exceeding this limit can reduce your benefits by $1 for every additional $2 you earn.

But you have to get a second job after retirement, leave your social security fund untouched until the age of 66 or 67 when you plan a full retirement. This way, you’ll receive much higher monthly checks and your retirement fund will be spread over fewer years. The income cap lowers to $45,360 after you reach your full retirement age, which means that for every $3 earned over the limit, you’ll be losing $1 of the social security benefits.

Retirees with higher income are required to pay surcharge on prescription drugs and outpatient coverage under the Medicare plan

Beware Medicare surcharges

Having additional income on top of your social security checks could also push you into a higher tax bracket and increase Medicare costs. Retirees with higher income are required to pay surcharge on prescription drugs and outpatient coverage under the Medicare plan.

This surcharge applies to people who earn over $85,000 individually or $170,000 as a couple who has filed for joint returns. Jones says that if you continue to work after the retirement age, you’ll be subjected to these surcharges which are unavoidable.

Don’t overlook RMDs

Once you cross the age of 70 years, the government requires you to take out a minimum amount of distributions (also called RMD) from specific retirement accounts every month. If you’re working till your late 60’s and have saved up some money from your part-time job, it can be easy to forget about these RMDs.

But even if you’re doing well financially without the social security, you are still required to take out these distributions. If your part-time job offers a 401(k) plan, you can still make contributions towards the fund without tapping into your savings but you’d still have to take RMDs from your other traditional retirement accounts. Not doing so can cost you penalty tax of up to 50 per cent.