When I Retire, Can I Still Work? The Financial Impact

It is common for individuals to consider continuing to work in some capacity even after formally retiring. This decision often stems from a desire to remain active, pursue new interests, or simply supplement retirement income. Navigating the financial implications of working while receiving retirement benefits requires understanding various rules and regulations. This article explores the impact of working on Social Security benefits, other retirement savings, Medicare enrollment, and tax obligations.

Working While Receiving Social Security Benefits

Working while receiving Social Security benefits involves specific rules, particularly if you are below your full retirement age (FRA). Your FRA is the age you become eligible for 100% of your Social Security benefits (66-67, depending on birth year). If you claim benefits before reaching your FRA, your earnings may be subject to an earnings test.

For beneficiaries under their FRA, Social Security may withhold a portion of benefits if earnings exceed annual limits. For example, Social Security deducts $1 from benefits for every $2 earned above a threshold. This earnings test applies until you reach your FRA.

In the year you reach your FRA, a higher earnings limit applies, with a different reduction rate. Social Security deducts $1 from benefits for every $3 earned above this limit until you reach your FRA. Once you reach your FRA, the earnings test no longer applies, allowing you to earn any amount without benefit reduction.

Benefits withheld are not permanently lost. Social Security recalculates your benefit amount once you reach your FRA, crediting you for withheld months. This results in a higher future monthly benefit, adjusting for temporarily held back benefits.

Impact on Other Retirement Income and Savings

Working in retirement influences how you manage other income sources like private pensions, 401(k)s, and IRAs. Many employer-sponsored plans allow distributions while employed, though rules vary. Working generally does not prevent accessing these funds, but may affect withdrawal timing or amount.

Required Minimum Distributions (RMDs) typically begin at age 73 for most accounts. If still working for your 401(k) sponsor, you may delay RMDs from that plan until retirement, if not a 5% owner. This exception does not apply to IRAs, 403(b)s, or 457(b) plans; RMDs must still be taken regardless of employment.

Earning income reduces immediate reliance on accumulated retirement savings. This allows investments to grow longer, benefiting from compound returns. Preserving principal creates a larger financial cushion, enhancing your retirement portfolio’s longevity and stability.

Medicare Enrollment and Working

Navigating Medicare enrollment while working requires careful consideration of employer-sponsored health coverage. Most individuals become eligible for Medicare at age 65, with an Initial Enrollment Period (IEP) spanning seven months around their 65th birthday. During this period, you can enroll in Medicare Part A (hospital) and Part B (medical).

Medicare Part A is typically premium-free for those who paid Medicare taxes through employment. If you or your spouse work and have employer health insurance, you may delay Medicare Part B enrollment without penalty. This rule applies only if the employer has 20 or more employees.

If the employer has fewer than 20 employees, Medicare usually becomes the primary payer; delaying Part B enrollment could lead to penalties and coverage gaps. When employment or employer coverage ends, you typically qualify for a Special Enrollment Period (SEP) to sign up for Part B without penalties. This SEP lasts for eight months after employer coverage ends or employment ceases. Additionally, higher income from working may subject you to the Income-Related Monthly Adjustment Amount (IRMAA) for Medicare Part B and Part D premiums.

Tax Considerations for Working Retirees

Earning income in retirement introduces tax considerations. Wages or self-employment income from continued work are subject to federal and often state income tax. This earned income also remains subject to Social Security and Medicare taxes (FICA taxes).

Additional income can impact Social Security benefit taxation. Depending on combined income (adjusted gross income plus non-taxable interest plus half of Social Security benefits), up to 85% of Social Security benefits may become federally taxable.

Higher income can also push you into a higher marginal tax bracket. This could result in a larger percentage of your overall income, including retirement account withdrawals and investment gains, being subject to higher tax rates.