Bob Dylan first sang, "Times they are a-changing" way back in the '60s. Who knew the song could become a retirement anthem for anyone born in that same decade?
We are in a new era of retirement planning in the U.S. Many older Americans haven't saved enough in their working years for financial security in retirement. Even with people knowing the importance of retirement saving, many of those still at the height of their careers aren't doing much to set money aside, let alone saving the 10% minimum experts recommend.
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Without sufficient savings, older Americans have to rethink their retirement outlook. They don't have decades to grow a nest egg, and that leaves them with three options: keep working, rely on Social Security, and downsize their expenses. Many will choose to keep working, and not only for the financial benefits. The right part-time role can be personally fulfilling and provide social engagement.
For those reasons, transitioning to part-time work in lieu of full retirement may soon become the norm. If that's a plan you're considering, here's what you should know about the effect on your Social Security benefits, taxes, and Medicare.
How part-time work affects your Social Security benefits
If you claim Social Security before Full Retirement Age (FRA), you are subject to an earnings limit. For every $2 you earn above the annual earnings limit, your monthly benefit is reduced by $1. In 2020, the earnings limit is $18,240.
The good news is that investments earnings, interest, pensions, annuities, and capital gains don't count. And if you're self-employed, the Social Security Administration (SSA) only looks at your net self-employment earnings.
Also, the benefit reduction is not a permanent one. Once you reach FRA, which is between the ages of 66 and 67, your wages no longer affect your Social Security income. At that point, the SSA recalculates your benefit and you'll see a larger check from Social Security going forward.
Still, if you prefer to avoid the reduction entirely, you have two options: Keep your earnings below the limit, or wait until the month you reach FRA to claim your Social Security benefit.
How part-time work affects your taxes
Your tax bill in retirement has several moving parts, including your income from wages, Social Security, and retirement distributions. Most of those, except for Roth IRA distributions, are probably taxable. If you plan on supplementing your part-time income with taxable retirement distributions, your income could go up or down. Crunch the numbers based on your planned distributions and expected paycheck to see how your income, and tax burden, will change.
If you transition to part-time work and delay your retirement distributions and Social Security, you're likely to fall into a lower tax bracket and enjoy a smaller tax bill.
The story's a tad more complicated if your only income sources will be Social Security and your part-time job. Up to 85% of your Social Security benefits are federally taxable when your "combined income" exceeds certain thresholds. Combined income equals adjusted gross income (AGI) plus nontaxable interest plus half of your Social Security benefits.
Single filers avoid taxes on Social Security benefits by having combined income below $25,000. For joint filers, the threshold is $32,000. Your job may push you above those thresholds. But that's a necessary downside if you need the income to cover living expenses.
How part-time work affects your Medicare
You are eligible for Medicare Parts A and B at age 65. Medicare Part A is hospital insurance that's free to anyone who's paid Medicare taxes for at least 10 years. Part B is paid insurance that covers doctors' visits, preventative services, and outpatient care. If you still have a job, you may also have access to an employer-sponsored plan.
If the employer offers health benefits to part-time employees, reach out to your benefits administrator to discuss your healthcare options. Medicare may be optional or required, depending on the number of people covered in your employer plan. In a small plan that covers fewer than 20 people, you have to get Medicare. The employer plan, should you keep it, becomes your secondary insurer. Under a large plan, you can choose from these options:
- Stay solely with the employer plan
- Transition entirely to Medicare
- Use the employer plan as your primary insurer with Medicare as your secondary
The right strategy for you depends on the relative costs of your options and how much coverage you want.
Normally, you'd apply for Medicare three months before your 65th birthday. If you've already applied for Social Security, you'll be enrolled in Medicare Parts A and B automatically. Should you decide to stay solely on your employer's plan, you can cancel your Medicare enrollment in the first few weeks.
Plan first, then enjoy
Even if your decision to continue working is a financial necessity, you can navigate this new retirement terrain gracefully. Find a job you love first. Then sort out your strategy for Social Security, taxes, and Medicare. Once the dust settles, you can update your retirement anthem to a different Bob Dylan song and focus on being "forever young."
