Working in Retirement? Here’s Why That’s Great… and Why It’s Really Not

If you want to keep working in retirement, more power to you. If you have to keep working in retirement, that’s not so hot. Working in retirement can be an awesome way to stay active and engaged while filling your hours with structured activities and interaction with your coworkers. And of course, the money doesn’t hurt, either. Every little bit helps, and cash you earn from working is money you get without having to rely on Social Security or your savings to cover. On top of all that, there is some evidence that working longer may help people live longer as well. All those reasons — and more — make working in retirement a great option for many people. Still, if you’re working not because you want to, but rather because you have to, then working in retirement may not really be as great an idea as it seems on the surface. Here are four key reasons why working in retirement isn’t all it may be cracked up to be.

No. 1: You may not be earning new Social Security benefits

Your Social Security benefit is based on your highest 35 years of covered earnings. If you’re in your mid-60s or beyond and still working, chances are that you already have 35 years on your earnings record. As a result, at best, you might be replacing lower-earnings years with higher-earnings ones, but you could also be paying those taxes to see no additional net benefit from them at all. Social Security taxes can chew through as much as 12.4% of your salary (half paid by you, half paid by your employer). That’s a lot of money to tie up in taxes for a program that you’re no longer really accruing new benefits for, but it’s exactly what you’re likely to face when you work during retirement.

No. 2: Your Social Security check could be reduced

If you’re under your full retirement age — between age 66 and 67 for those who haven’t reached it yet — then working while collecting Social Security can come with substantial penalties attached. You can lose as much as $1 for every $2 you earn above $19,560 per year. That’s a pretty harsh penalty — and it generally makes it not worthwhile to collect Social Security if you’re working and still below your full retirement age. If you claimed early because you lost your job but later found another job, you might have a do-over available. Within one year of claiming Social Security, you can withdraw your application and return every penny you’ve received, thus letting you claim again later.

No. 3: It’s hard for compounding to help you all that much

If you are working because you have to, it means your savings aren’t sufficient to cover your costs. While you should still figure out ways to shore up your nest egg, you also need to recognize that compounding is not nearly on your side as much as it once was after you hit retirement age. The key issue with compounding is that money you expect to spend within the next five years does not belong in stocks. If you’re looking for your nest egg to cover your near-term costs, that higher-certainty near-term money won’t have the same return potential as stocks could. In addition, once you spend that cash, it’s gone. At some point, you’ll need to replenish it by converting more of your higher-risk investments into lower-risk ones, which reduces the amount you have available to compound faster. As a result, while you should still be socking away money for when you do call it quits, you should also be focusing on ways to get your structural costs down. The lower your everyday costs, the easier it will be for Social Security and your savings to cover them once they need to.

No. 4: Income-based costs mean your money may not go as far as you think

Even if you are old enough so that you don’t face a direct penalty for working while collecting, your Social Security benefit might get taxed if your income is high enough. If you’re single, a combined income as low as $25,000 can subject your Social Security to taxes, and if you’re married filing jointly, the taxes start with an income as low as $32,000. In addition, your Medicare Part B premiums are also based on your income level. Charges go up for single folks with incomes above $91,000 or married folks who file jointly with incomes above $182,000. If you’re working because you want to, those higher costs and taxes may not seem all that bad, but if you’re working because you need the money, they just make it harder to reach financial freedom.

Get started now to retire for real

By the time you reach retirement age, you have likely worked for decades to take care of yourself and your loved ones. To make the most of your golden years, you need a plan that lets your money take care of you. That type of planning takes time. Even if you’re past the age where you would like to put away your work boots for the last time, you can still take steps to shore up your financial future. Still, the sooner you get started, the more runway you’ll have to make it a reality and enjoy the fruits of your labor while you’re still young and healthy enough to do so. So get started now, and improve your chances of reaching the point where working in retirement is a choice rather than a requirement.