Working in Retirement: What to Consider
For more and more Americans, retirement means … well, not retiring.
Whether it’s because of financial setbacks, a long-time goal to open a small business, or a feeling that it’s not quite time to walk away from the job, many retirees are continuing to work. The decision may be an easy one, but in our nearly 50 years of experience at Linscomb & Williams, it’s important to look at the big picture. There are benefits to working longer, but there can also be other considerations you’ll want to review.
First, let's acknowledge the reality of a scenario that is becoming more common. There are 10,000 Baby Boomers who turn 65 every day, and all Baby Boomers will be at least 65 years old by 2030. The age of 65 used to be the standard time for retirement, but that is changing with the times and increased longevity. No one wants to outlive their retirement money.
Of the 10,000 Baby Boomers turning 65 every day, 17 percent don’t have $5,000 in retirement savings, and 20 percent have less than $5,000 in personal savings outside of a retirement account. Consequently, many Baby Boomers may have no choice but to adjust their retirement plans, pushing retirement to a later date, or possibly not retiring at all.
The solution for some Baby Boomers is leaving their day-to-day job for something they enjoy more, picking up a part-time or even full-time job somewhere else. Sometimes, this means opening their own business.
While working later in life can offer many financial benefits, such as bringing home a steady paycheck and taking advantage of employer-sponsored healthcare plans longer, there are also some key factors to keep in mind.
Working Full-Time in Retirement
There are a number of added benefits to maintaining full-time work in retirement.
For starters, of course, you continue to get a full-time income. Depending on where you are in your career, this can mean maintaining a high income, or even increasing it further. Full-time work often comes with access to benefits like a retirement plan (and employer match), healthcare benefits, and other employee perks.
Maintaining healthcare benefits in retirement is a significant benefit that should not be overlooked. While health insurance exists outside of your employer, the added savings from employer benefits can be sizable, especially for older individuals. Don’t underestimate the cost of important healthcare treatments, routine checkups and even the price tag attached to dental and vision services. These can cost around $13,000 on average per year.
At Linscomb & Williams, wealth management is a priority. Make sure to discuss your decision to work longer with a financial advisor, so you can more effectively turn your extra work into visible retirement benefits in the future.
Key Takeaways for Your Retirement Savings
Working full-time means you can fully prepare for retirement without making any life changes. You can postpone your Social Security payments, increasing the benefit you will receive in the future.
However, it’s important to remember the potential disadvantages that occur from working in retirement, such as staying in (or moving into) a high-tax bracket at the end of each year.
If you need to postpone your official retirement, and can still handle the added stress and demands of a full-time position, working a full-time position can be a great way to significantly improve your financial picture. If you aren’t thrilled with the idea of a full-time commitment, you still have other options.
Working Part-Time in Retirement
Part-time work is another viable option during retirement. Though the benefits are abbreviated compared to full-time employment, you can still experience some of the merits of working during retirement.
The recent pandemic has negatively affected a number of industries, but today’s technology and gig economy offer a number of ways to find and undergo employment. If you want to use well-developed skills in a part-time capacity, the economy can likely accommodate that.
Some of the most common jobs for retirees include bookkeeping and office management, but the possibilities are as endless as your hobbies. Retirees can use their time-flexibility to their advantage.
Working part-time will take some of the financial pressure off your current savings and allows you to cover part of your expenses without a resulting increase in your tax bracket each year. Depending on how much you’ve saved, part-time work can provide some financial peace of mind while you enjoy some extra free time. On average, part-time workers earn about $23,000 per year. This amount can be a solid bridge if your monthly expenses are just out of reach in retirement.
Working part-time can also make the shift into retirement less dramatic for those not 100 percent ready to stop working. Going from working every day to not working at all can shake up the schedule that you and your family have followed for years, if not decades. Working part-time can make this change more gradual, by decreasing your hours instead of making a hard stop.
Please note: The benefits of part-time employment come with a few cons. Though the income level shouldn’t cause any harm to your taxes, part-time work can only be a small supplement at best. What’s more, working part-time means you will more than likely lose full-time benefits. That means no retirement plan contribution or employer-sponsored healthcare benefits.
Make sure you discuss the out-of-pocket costs of healthcare and limited benefits to individual retirement accounts with your financial advisor. Additionally, working even part-time can affect your Social Security benefits if you've not yet attained your full retirement age. At these earlier ages, once your annual earnings exceed $18,240, your Social Security benefits may be reduced.
Key Takeaways for Your Retirement Savings
You have plenty of leeway when working part-time. Whether it’s one day a week, or just a few hours five days a week, you can experience the benefits of flexibility and income. The extra income may not be life-changing, but can win you a retirement lifestyle gain, nonetheless.
Be sure to create an accurate monthly budget that can cover your essential expenses and healthcare. If you have any discretionary income, talk to your financial advisor about investing in a tax-advantaged retirement account, or adding to your emergency savings.
Starting a Business During Retirement
Being a business owner can be a fulfilling experience, whether you’re at retirement age or not. Running your own business can offer a blend of flexibility and income potential on top of enjoying your craft. However, like with any other important financial decision, keep the positive and negative sides of business ownership in mind.
For example, the income for any company is potentially unlimited. But not all businesses are created equal. It’s important to know what you can potentially earn as a business owner to properly plan and manage your retirement years. If you are exploring opportunities and looking at franchise opportunities or attending trade shows, realize that promotional projections are typically on the rosy side.
On average, a small business with no employees makes about $46,000 per year in revenue. Is this a reasonable range for your business? The better you can accurately predict your income as a small business owner, the better you can manage your expectation and plan your retirement accordingly.
Whether it’s a passion project, an appealing opportunity, or both, starting a business puts you in the driver’s seat as it pertains to salary, size, and schedule. You can operate as an independent contractor or manage your own entity, while experiencing the income potential of these different working agreements.
For some, this added control can be very refreshing, and a big change from the rigidity of working for someone else. Still, be sure to consider the added risk that comes with flexibility.
Failure shouldn’t be a complete deterrent from starting your own business, but it is important to consider. As 20 percent of small businesses fail in their first year alone, can your financial picture support a slow start to your company? Or the possibility of ups and downs in your revenue? Small business success doesn’t usually happen overnight. Take inventory of your financial picture, and evaluate if your savings and income can sustain a business start-up to the point of success.
Your tax situation may also become a bit trickier as a business owner. Business owners have more write-offs at their disposal, but proper recordkeeping, bookkeeping, and overall due diligence is essential.
Business owners are also afforded additional retirement benefit opportunities. The annual contribution limit for retirement accounts available to business owners is significantly higher than 401(k)s and individual accounts. Even if you are self-employed with no employees, you can still utilize a number of appealing retirement accounts.
For example, in a SEP-IRA, you can put away the lesser of $57,000 in 2020 (or up to 25 percent of compensation) or net self-employment earnings up to $285,000. This tax-advantaged savings can be a huge leap forward in your retirement and tax savings.
Unique retirement accounts are among the biggest benefits you receive as a business owner. Be sure to talk to your financial advisor so you take full advantage of your options.
Key Takeaways for Your Retirement Savings
Once you’ve done your due diligence on your business idea, be sure to double-check and make sure your current savings and spending needs can support the sporadic income of business ownership. As mentioned before, retirement accounts for business owners have the highest contribution limits of all retirement accounts.
If you have the income to support yourself, running a business in retirement can be highly fulfilling – both on a personal and financial level. As always, work closely with your financial advisor so your investments, taxes, and retirement planning are in sync.
The Bottom Line
Everyone’s retirement picture is unique. Wherever you are in your financial life, your financial decisions have their merits and potential challenges. The most important factor is to find the arrangement that satisfies your needs and can fit within your risk tolerance.
If you decide to continue working in retirement, make sure it satisfies all of your personal and financial priorities as well, and be sure to consider the potential risks. Consulting a financial advisor will help you evaluate different scenarios with clarity, transforming a challenging financial decision into one that can be both successful and fulfilling.
Linscomb & Williams’ wealth management advisors can help. Click here to start a conversation.