Going Back to Work After Retirement: The Good, the Bad, and the Ugly

After a lifetime of working and saving, you’ve finally come to the point where you feel comfortable enough to retire. Though the long-winding path to reach this milestone was supposed to bring more peace of mind; instead, now that you’ve left the workforce, it has precipitated a fear of outliving your money. “The main financial motivation to return to work is that you need the cash,” says Jon King, CPA/PFS, CFP with Austin, Texas-based Pegasus Financial Solutions. “Some people in retirement find their expenses have gone up more than they figured, or something happens with the market, and they become concerned about outliving their resources.” And while the idea of returning to work after you’ve retired seems like a good idea on paper, there are implications that could affect your savings and any benefits you’ve already received. Here are three financial considerations to take into account before returning to work after retiring:

1. The Good: Health Coverage

Aging is an inevitable part of life, but it can lead to increased healthcare costs down the road. Depending on your health benefits, these costs can be a drain on your savings. For people who retire under age 65, health coverage can be a primary motive for returning to work (especially when you consider the expensive out-of-pocket costs for private insurance). “If you’re buying expensive private medical insurance before age 65 when you’d qualify for Medicare, then you might benefit from some medical coverage by returning to work,” says King. In most cases, a group health plan offered by an employer could be a cheaper alternative than paying privately on your own. However, eligibility requirements differ across employers (some of which might even provide health benefits to part-time workers while others do not). The bottom line: whether it’s practical or not to return to work after retirement depends largely on your own financial situation. Before making a firm decision, consider all factors including your income sources, budget, in addition to the tax implications you may incur on any benefits you receive.

2. The (Possibly) Bad: Social Security

Depending on your age at the time of retirement, the income you receive from Social Security could be reduced if you decide to re-enter the workforce. The Social Security Administration defines full retirement age (FRA) as 67 for people born in 1960 or later. Retiring before reaching FRA will lessen the amount of Social Security benefits you may receive. “If you haven’t attained full retirement age there’s an offset that, depending on when you retire, can lower your Social Security payment,” King says. If you retire and go back to work before you have reached your FRA, your Social Security benefit is reduced 5/9 of 1% for each month before FRA (up to 36 months). If the number of months exceeds 36, then the benefit is further reduced 5/12 of one percent per month. If you are under full retirement age for the entire year, the Social Security Administration will deduct $1 from your benefit payments for every $2 you earn above the annual limit. For 2020, that limit is $18,240. In the year you reach full retirement age, we deduct $1 in benefits for every $3 you earn above a different limit. It is important to note that any reduction benefits is only temporary and more comparable to “withholding,” says Rande Spiegelman, CPA, CFP, vice president of financial planning with the Charles Schwab Center for Financial Research. “You will get the money back in the form of a higher benefit at full retirement age, so we don’t believe most people should be concerned about earning too much,” he says. No matter what your FRA is, you are eligible to begin receiving benefits as early as age 62 or as late as age 70, however, the longer you put off accessing Social Security, the higher amount you will receive.

3. The (Possibly) Ugly: Pension Suspension

If you’ve received a pension from your past employer, it could be affected if you decide to return to work. While rules may vary from plan to plan, you may still receive pension payments from your former employer if you rejoin the workforce for a different company. You’ll be able to further increase your income stream by receiving pension payments from your old job while earning a salary at a new one. However, payments could stop if you decide to return to your former employer. Though rules may vary depending on your employer’s pension plan, the company paying your pension will generally suspend benefits if you end up working for them again. If you do decide to return to your former workplace, be sure to check with the company to learn more about how your pension may be affected in the event you return to work.