Feeling unprepared for retirement? Gig work in your senior years could be the solution. At least that's a conclusion made by a 2020 report from the Center for Retirement Research at Boston College. The study analyzes income replacement rates in retirement for different categories of workers, including those who had large income shortfalls at age 62. Among that group, those who transitioned from traditional work to gig work at 62 were able to shrink their income gap by ages 67-68. Interestingly enough, the gig workers were able to cover more of their income shortfalls vs. those who stayed in their traditional jobs.
You could experience the same result, especially if your gig income allows you to delay claiming your Social Security and/or making withdrawals from your savings. Here's a look at three ways you can manage those income streams to close up your retirement income shortfall by your late 60s.
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1. Let the gig work pay the bills
Generate enough income from gig work and you may not need to touch your savings or your Social Security immediately. That's an ideal scenario since both should grow on their own over the next five or six years. Every $100,000 of savings you have should grow to nearly $128,000 in five years if you have it conservatively invested at 5% annual growth. And delaying your Social Security claim raises your benefit amount -- first, because you avoid early retirement reductions and, later, because you earn delayed retirement credits.
2. Claim Social Security early and delay retirement distributions
If your gig work income isn't enough to pay the bills on its own, you could claim Social Security early and put off your retirement distributions until later. Before you decide on this approach, you should know the rules on earning income while receiving Social Security benefits.
You are subject to income limitations if you start receiving Social Security before you reach full retirement age (FRA). For anyone born after 1942, FRA is at least 66 and at most 67 years old. The income limit can be adjusted each year, but it's $18,960 in 2021. In the years prior to reaching FRA, your Social Security benefit is reduced by $1 for every $2 earned above that cap. In the year you reach FRA, your earnings are reduced by $1 for every $3 you earn above a different cap. That cap in 2021 is $50,520. Only the money you make before your FRA month is counted.
This strategy makes more sense if two things are true: One, you know you won't exceed those income caps; and two, a down market has affected your retirement savings balance, and you'd prefer to wait for a recovery before taking distributions.
3. Delay Social Security and take retirement distributions
The third option is to delay your Social Security benefits and use retirement distributions to supplement your gig work income. Waiting to claim Social Security does increase your benefit. Those increases are calculated based on your claiming age relative to your FRA. If you claim before FRA, early retirement reductions can shave up to 30% off your Social Security income. And if you claim after FRA, delayed retirement credits can increase your benefit by up to 24%.
What's nice about this strategy is that the income increase you receive is predictable and lasts the rest of your life. To estimate your benefit at different claiming ages, create an account and log in to my Social Security.
Early distributions from your retirement account may also help you with RMDs, or required minimum distributions. These are mandatory, taxable distributions you must take from your IRA or 401(k) accounts starting at age 72. They're based on your balance at the end of the prior year, along with your life expectancy. If you consume more of your money in earlier years, that lowers your balance later. In turn, your required distributions should also be lower. That gives you the option to leave more money in your account if you don't need it to pay your bills.
Gig work for improved financial security
Seniors are closing up their retirement income shortfalls with gig work, and you can do the same. Once you find a gig you enjoy, take the time to define your strategies for Social Security and savings withdrawals. Make the right moves and you could be enjoying a comfortable, more traditional retirement in your 70s.
