How Returning to Work after Retirement Could Impact Your Finances

By Britt Erica Tunick

Retirement is the finish line everyone in the work force is running toward—it is the freedom and flexibility that we all dream about during our working days. Nonetheless, whether for financial reasons, social interaction, or other reasons, many people who retire ultimately decide to return to work, even if it is just on a part-time basis. Jumping back into the workforce, however, can actually harm your financial situation if you aren’t careful.

 If you are retired and have found that you need extra income, or if you simply miss the social camaraderie of the workplace, returning to work may well be a good idea. But, before you do so, make sure that the money you earn by resuming work won’t subject you to a reduction of your Social Security benefits, particularly if you have not yet hit full retirement age (which varies, based on the year you were born). Returning to work could also change your tax bracket, as any new income will be combined with any other pension or retirement income you receive. Your health insurance benefits could also be impacted, particularly if you are receiving Medicare.

Although individuals born between 1943 and 1954 can retire as early as age 62, doing so means receiving less than the full Social Security benefits you would otherwise be entitled to if you waited until full retirement age. It also means that, if you decide to return to work, you could see your Social Security benefits significantly reduced depending on how much you earn. If you take early retirement and decide to return to work before reaching your full retirement age, for every $2 you earn above $18,960 in 2021, the Social Security Administration will deduct $1 from your Social Security benefits. And if you return to work the same year that you retire, the Social Security Administration takes $1 for every $3 earned above $50,520 for 2021.

At present, the full retirement age set by the Social Security Administration is age 66 for anyone born between 1943 and 1954, with the age gradually increasing for those born in later years. For example, the full retirement age is 66 years and two months for individuals born in 1955, 66 years and 10 months for those born in 1959, and 67 for anyone born in 1960 or later. The longer you wait to take Social Security benefits, the higher the amount you will receive, up until age 70. Once you reach age 70, the Social Security Administration will pay you the maximum amount you are eligible for based on your lifetime earnings, so there is no reason to wait to start taking your benefits beyond that point.

Fortunately, deductions from Social Security based on income you earn from returning to work are not permanent and only last until you reach your full retirement age. At that point, the Internal Revenue Service reassesses your Social Security benefit amount, you are credited for months when you didn’t receive benefits, and you receive the full amount you are eligible for. Still, while your Social Security benefits can no longer be reduced once you reach full retirement age, they are included in your overall annual earnings and could ultimately be taxed up to 85% if you earn more than a certain amount each year. For 2021, that threshold is $34,000 for individuals and $44,000 for married couples. The taxation rate drops to 50% for individuals who earn between $25,000 and $34,000 (or between $32,000 and $44,000 for married couples). To avoid taxation of Social Security benefits, an individual must earn less than $25,000, which includes any pension or other retirement income, while married couples must earn below $32,000. If returning to work puts you into a higher tax bracket, it could also potentially impact your Medicare coverage and leave you with higher surcharges for certain expenses.

If you have already retired and are contemplating returning to work, the best thing you can do is speak with a financial advisor or tax specialist to make sure you have all the facts about how it could impact your finances. If your reason for returning to work is social interaction, and you don’t need the extra money, volunteering may be a better route to pursue.