How to Unretire

A woman explains how to unretire

The decision to retire is often the culmination of years of planning. After retiring prematurely in the pandemic, however, many people are mulling a return to the workforce. Whether your finances are stretched or you still have professional aspirations, there are a few things to consider before you unretire. First, make sure you’re doing it for the right reasons.  

Deciding to Unretire

“Going back to work is a very big decision. It should not be made too quickly or without proper guidance,” says Doug Carey, Chartered Financial Analyst (CFA) and president and owner of WealthTrace, retirement and financial planning software. “Make sure this is something you actually need to do. Some people panic when the stock market declines and think they will run out of money in retirement. But many of them are just guessing.” 

Consult with a financial planner or use retirement planning software to assess the reality of your financial pressures. When you have a clear picture of your finances, you can more accurately consider what else is driving you to re-enter the workforce, such as boredom or desire for social interaction. Once you have information to back your decision, you can consider other ways new employment may affect you.  

Your Social Security Benefits May Decrease  

If you are drawing Social Security benefits at the time you unretire and haven’t yet hit full retirement age, you may temporarily lose benefits. The retirement age is 67 for those born after 1960. People younger than full retirement age who make more than a yearly earnings limit will see reduced benefits. However, while you work, you continue paying Social Security taxes, which may increase your benefit. 

Following is an explanation of how your proximity to retirement age will impact your Social Security payments if you unretire: 

  • If you are under full retirement age for the entire calendar year, the Social Security Administration (SSA) will deduct $1 from your benefit for every $2 you earn above the earnings limit, which is $19,560 in 2022. 
  • In the year that you reach full retirement age, you’ll lose $1 in benefits for every $3 you earn over a different limit ($51,960), up you reach full retirement age. 
  • Starting the month you reach full retirement age, there is no limit on how much you can earn while collecting your full benefits.  

The only earnings the SSA counts in the scenarios outlined above are wages, bonuses, vacations, and commissions from a job or your net earnings from self-employment. Pensions, annuities, investment income, interest, and other government or military retirement benefits are not counted. The SSA has a handy Retirement Earnings Test Calculator to determine how much your earnings will reduce your benefits. 

Suspending Your Social Security Payments 

If you have reached full retirement age but aren’t yet 70, you can temporarily suspend your retirement benefit payments. This allows you to earn delayed retirement credits for each month of the suspension. These credits will be added to the benefits you get once you start collecting. Once you hit 70, you will automatically get benefits again. 

If you are already enrolled in Medicare Part B, you still pay future Part B premiums during the suspension. Additionally, suspending your retirement benefits will make you ineligible for Supplemental Security Income (SSI) benefits.  

Tax Implications of Unretiring 

Whether retired or unretired, you’ll file your taxes annually as usual and report your new earnings to the IRS. Since you’ll likely be earning more than before, remember to update your withholdings. You can face penalties if you under-withhold.   

If you have a lot in retirement savings and perhaps a pension and multiple income streams, adding the income from work can result in noticeable tax implications.  

High income may trigger the following: 

  • Income-related monthly adjusted amount (IRMAA) surcharges. These surcharges for Medicare Part B and Medicare Part D can add up to hundreds more monthly than you would pay at a lower income.  
  •  Net investment income tax (NIIT). This 3.8% tax must be paid by individuals, estates, and trusts with modified adjusted gross income (MAGI) above certain thresholds. It also impacts those who have investment income from sources such as taxable interest, dividends, and realized capital gains. You’ll pay the tax on the lesser of either your net investment income or the excess of MAGI above $250,000 for married filing jointly or qualifying widow(er); $125,000 for married filing separately; or $200,000 in all other cases. 

“When people get to this point [of triggering higher taxes], some professional advice would be useful to talk about tax minimization strategies,” says Barbara O’Neill, an Accredited Financial Counselor and owner/CEO of Money Talk, a financial education company. “There are strategies that a professional advisor could help them with.” 

Should You Stay on Medicare? 

If you take a job that will provide private health insurance, but you’re already enrolled in Medicare, check with your employer to see whether the insurance is defined as “creditable” by Medicare. This means the coverage is at least as good as Medicare Part D coverage.  

If you drop Medicare and enroll in creditable coverage instead, you can re-enroll in Medicare again in the future without penalty. However, if you drop Medicare and the coverage you get instead is not creditable, you will face penalties when you re-enroll in Medicare.  

Also, check when your new private insurance kicks in. It may take a few months for coverage to start, so you will want to maintain Medicare coverage until that date.  

Continue to Monitor the Situation 

Once you’ve made these considerations, you’ll be ready to unretire confidently. Just remember that things change as you age. For instance, turning 70 triggers automatic distributions of Social Security benefits. You’ll want to reassess your situation regularly.  

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