As you plan your retirement, it is crucial to consider whether you intend to work, in any capacity, afterward.
While this wouldn't have been a common issue a few decades ago, in today's economy, an increasing number retirees are choosing to work -- and not just because they need the money. In one Merrill Lynch study of pre-retirees over age 50, 72% of respondents said their ideal retirement would include working.
Whatever the reasoning, continuing to work in retirement can be a fulfilling experience, and it could put you in even better financial shape when you walk away from the workforce for good.
IRA and 401(k) distributions
Many financial advisors advocate something called the "4% rule" for withdrawing retirement savings. Basically, this rule says that if you withdraw 4% of your nest egg in your first year of retirement, and then adjust that withdrawal for inflation each year afterward, your money has a very good chance of lasting your entire retirement.
If you plan to work after retirement, however, you may not need as much income from your investments. Instead, you could withdraw less money while you're working and leave more of the balance to keep earning returns.
Let's look at an example of a hypothetical $1 million retirement portfolio, which would provide $40,000 in income during the first year of retirement if you follow the 4% rule. We'll assume that the portfolio earns a 4% annual return, which is very conservative and can be easily achieved with a low-risk blend of fixed-income investments and equities. We'll also assume 2% annual cost-of-living increases over time.
If the retiree chooses to work part-time and makes $15,000 per year for the first four years of retirement, the income they need from their investment portfolio would drop to just $25,000. This leaves more money invested to compound so that your nest egg can keep growing while you work.
The graphic below shows how working part-time in retirement can put you on better financial footing without another dime being contributed to your investments. Simply limiting withdrawals by working part-time for the first four years can make your initial nest egg last much longer. In fact, our hypothetical portfolio won't even dip below $1 million until the 12th year of retirement.
Will the added income affect your Social Security?
It might, and it might not. It depends on the age at which you retire and how much you earn while working.
The Social Security Administration clearly differentiates between a person's "retirement age" and "stop-work age." Currently, full retirement age is 67 for those born in 1960 or later, and there is a sliding scale for those born before then; you can find yours here.
If you are below full retirement age, $1 is deducted from your benefit amount for every $2 of earned income above a certain amount (currently $15,480). So if you "retire" at age 63 and begin collecting Social Security, you can keep working, but if you earn, say, $30,000, your benefits will be reduced by $7,260 for the year. And during the calendar year you reach full retirement age, $1 is deducted from your benefits for every $3 you earn beyond another income threshold ($41,400 for 2014) until the month in which you reach full retirement age.
However, if any of your benefits are withheld due to your income, your monthly benefit will increase when you reach full retirement age. For a full description of all the potential scenarios, and for some examples, the SSA publishes a helpful brochure (link opens PDF).
Everyone is different
Some people choose to work well into their 80s, simply because they enjoy it -- or simply because they wouldn't know what to do with unlimited leisure time.
People who choose to continue working after "retiring" have a variety of personal financial situations. Some have millions of dollars in retirement savings, and some simply collect a pension and Social Security.
The point here is that you need to consider how working in retirement will affect your situation and decide whether it is the right move for you.
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