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Should You Consider Paid Work to Generate Additional Income in Retirement?

June 27, 2022

There are many reasons to pursue paid work in retirement beyond generating additional income. Work can provide a social outlet, create structure in your day, and provide a sense of accomplishment. However, in recent months, rising inflation has been the catalyst behind many retirees considering paid work to help offset the loss in purchasing power they’re experiencing at the gas pump, grocery store, local pharmacy, and more.

While paid work can be rewarding, keep in mind that working in retirement could impact both your Social Security benefits and the amount you owe in taxes.

For example, if you’re working and taking Social Security retirement benefits before you reach the normal retirement age (NRA), which is 67 for anyone born in 1960 or later, you may receive a temporarily reduced benefit. That’s because for every dollar you earn above a certain income limit, the Social Security Administration (SSA) will withhold some of your benefits. Here’s how it works. If you’re under your NRA, the SSA will hold back $1 in benefits for every $2 you earn from working, above $19,560. However, if you reach your NRA in 2022, the earnings limit jumps to $51,960, and $1 is held back for every $3 you earn until the month you reach your NRA. After that, the earnings limit no longer applies, the SSA stops holding money back due to work, and your monthly benefit will be permanently increased to account for the months in which benefits were withheld.1

Even if you’ve reached your NRA, and the earnings limit no longer applies to you, work in retirement could result in a higher tax bill. That’s because your earnings may push your income to a level where your Social Security benefits become taxable. However, no one pays taxes on more than 85% percent of their Social Security benefits.2 To learn how Social Security benefits are taxed, visit SSA.gov.

If you’re still working after age 72, your tax bill may go up again, when you’re subject to taking required minimum distributions from a traditional IRA or 401(k) plan. Keep in mind that taxes are one of the primary risk factors impacting income in retirement, along with market volatility, inflation, and longevity. That makes taxes an important consideration when weighing the benefits of continuing to work or returning to the workplace, during your retirement years. If you have concerns about the impact of taxes or inflation on your income in retirement, let’s schedule a time to talk.

1 http://www.ssa.gov/oact/cola/rtea.html

2 http://www.ssa.gov/benefits/retirement/planner/taxes.html

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