If you want and are able to work past a typical retirement age, then more power to you! Working can keep you mentally and physically active, help you keep a social circle, and fill several of the 24 hours we have in our day with meaningful activities. Especially if you enjoy your job and get paid reasonably for it, working well into your golden years can be a great part of your life.
Yet for many, working in retirement isn't really a choice, it's a necessity. If you find yourself in that situation, then rather than a pleasant way to spend your golden years, working may end up as quite a miserable obligation. Indeed, for seniors, working because you have to can be an especially rough way to spend your time. Here are three reasons that working in retirement may not be as great as it seems.
Image source: Getty Images.
1. You could lose a lot of your Social Security benefits
A key reason people go back to work in their senior years is that they realize that their Social Security checks aren't enough to cover their costs. Social Security itself warns that on average, the program only replaces around 40% of workers' pre-retirement incomes, making it a rough transition for those who don't have other sources of income.
Unfortunately, if you start collecting your Social Security benefits before your full retirement age -- somewhere between ages 66 and 67 if you haven't reached it yet -- going back to work can be painful. That's because you face a massive penalty of as much as $1 for every $2 you earn above $21,240 within the year.
The good news is that you can get the amount you lost to that penalty back over time, beginning when you reach your full retirement age. The bad news, though, is that in addition to losing the money to the penalty up front, you're also stuck with a permanently reduced monthly payment from starting to collect early.
2. You might be paying taxes without earning new Social Security benefits
Social Security uses your highest 35 years of covered earnings to calculate what your benefits will be. If you've gone back to work after retiring just to make ends meet, your salary may not be as high as it was during your peak earnings years. Unless you earn enough to knock one of your earlier working years off the list, you're paying new taxes into the Social Security system without getting anything out of it for yourself.
The Social Security earnings tax is 12.4% -- half paid directly by employees, and half paid by employers on the employee's behalf -- on your first $160,200 of earnings. That could work out to thousands of dollars you have to pay in taxes, while ending up with the same benefit you'd have received without working another day.
3. Compounding isn't doing you as much good as it could have earlier
Based on the Rule of 72, money you save early in your career could potentially double five or six times by the time you're ready to retire. That can turn $10,000 invested early into somewhere in the neighborhood of $320,000 to $640,000 when you need to start tapping your money for expenses. Not only is that a substantial amount on its own, but the money you're not actively spending from that nest egg can also continue to compound for your future.
Contrast that with $10,000 that you invest late in your career. The opportunity to double multiple times just isn't there for late money, so it contributes much less to your ultimate retirement nest egg. As a result, if you're working in retirement because you have to, then finding ways to help get your costs down is at least as important as building your nest egg.
Start planning now to get your retirement closer to where you want it to be
Working in retirement -- if it's by your choice, with a solid financial foundation in place -- can be a wonderful way to spend your time and create a positive impact. If that's part of what you hope to do in your golden years, then you should certainly feel free to do so.
Regardless of whether working in your golden years is part of your plan, the stronger your nest egg, the better your chances are of being able to tackle your retirement on your terms. The sooner you get started building a nest egg, the greater your chances are of getting it where you need it to be by the time you retire. So get started now, and improve the odds that you'll retire on your terms.
