Retired, but Returning to Work? Here's How it'll Impact Your Bottom Line

Are you a formerly retired worker who has chosen to go back to work? Maybe you need the money, retirement bores you, etc. You're not the only one! Of workers age 65 or older, 40% had previously retired at some point, according to a 2019 report from Rand Corporation.

By 2024, the Bureau of Labor Statistics (BLS) projects that the labor force will grow to about 164 million people. That number includes about 41 million people who will be aged 55 and older. The BLS predicts that 13 million of these workers will clock in at ages 65 and older.

You'll want to work out a few financial details before you start blasting your resume out to everyone you know. Let's take a quick look at what you need to consider before you return to work. 

Consideration 1: Work-Related Expenses

Did you forget how expensive those business suits were when you were working? You'll need to consider all the extra expenses you'll shell out: business professional attire, makeup, transportation, lunches out of the office every day — your newfound income may absorb the cost of simply getting ready for or going to work. 

Of course, this depends on the requirements of your new job. If you don't have to dress up or you work from home, you may not face extra expenses.

Consideration 2: Changing Tax Situation

You'll have to pay income tax and payroll taxes on your newfound income. Combined with your existing income, this may change your tax situation. 

You may find that your tax situation becomes more complicated just by taking on a new job. Talk to a financial planner and/or tax professional so you understand how taking on a job will change your taxes, tax bracket, and how much you'll pay in taxes.

Currently, for 2021, the marginal tax rate is as follows, though that will likely change for 2022:

• 37%: Individual single taxpayers with incomes greater than $523,600 ($628,300 for married couples filing jointly).
• 35%: Individual single taxpayers with incomes over $209,425 ($418,850 for married couples filing jointly).
• 32%: Individual single taxpayers with incomes over $164,925 ($329,850 for married couples filing jointly).
• 24%: Individual single taxpayers with incomes over $86,375 ($172,750 for married couples filing jointly).
• 22%: Individual single taxpayers with incomes over $40,525 ($81,050 for married couples filing jointly).
• 12%: Individual single taxpayers with incomes over $9,950 ($19,900 for married couples filing jointly).
• 10%: Individual single taxpayers with incomes of single individuals with incomes of $9,950 or less ($19,900 for married couples filing jointly).

Consideration 3: Potential Reduced Social Security Benefits

Earned income may affect your Social Security benefits, but it depends on your age. The Social Security Administration (SSA) defines the full retirement age as between 66 and 67 for those born on or after 1943. If you haven’t yet reached your full retirement age, working could temporarily reduce your Social Security benefits.

You'll get more Social Security the longer you wait, but if you go back to work during the year you reach your full retirement age, $1 in benefits will be deducted for every $3 you earn above a higher limit ($50,520 in 2021), but only counting earnings before the month you reach your full retirement age, according to the Social Security Administration.

Your Social Security benefits may be taxable, depending on your modified adjusted gross income (MAGI). (Check out Social Security and Equivalent Railroad Retirement Benefits or consult with a tax advisor. You may want to consult with a tax advisor if you've already taken Social Security benefits.)

Consideration 4: Medicare Eligibility and Insurance Benefits from a New Employer

Group health insurance may offer a tantalizing option if you've been paying for Medicare. Find out from your employer's human resources department to learn more about how employee insurance will work with Medicare. Compare your coverage options between both your new employer and your Medicare coverage. In addition to extra income from a job putting you in a higher tax bracket, you might be responsible for additional costs for Medicare, including a premium surcharge for Medicare Part B (outpatient coverage) and Part D (prescription drug coverage), depending on your income.

Consideration 5: Required Minimum Distributions

You must take required minimum distributions (RMDs) from most retirement accounts once you turn 72. However, there's an exception to the RMD rules — sometimes called the still-working exception — that lets you delay RMDs until you retire.

You don't have to take RMDs from your current employer-sponsored retirement account (such as a 401(k), 403(b), or small business account) if you're still working, do not own more than 5% of the business you work for and have an employer-sponsored retirement account with the business you work for. 

In this case, you may delay taking an RMD from the account until April 1 after the year you retire. 

However, this is important: This rule doesn't apply to IRAs or other accounts from companies you don't work for anymore.

Otherwise, if you want to contribute to a qualified retirement plan, you can, and can also contribute to a traditional IRA or Roth IRA if you have earned income. Consider your personal goals, time horizon and risk tolerance before you choose the right asset allocation for your portfolio.

The Bottom Line for Returning to Work or Not

Think you're ready to go back to work after already having your retirement party? If you think you might want to do so, you'll want to consider a wide variety of considerations, including the financial implications of choosing to go back to work. 

Consider all sources of income, especially if you need to take RMDs. Walkthrough your budget and determine how it will affect your taxes as well. Whenever necessary, don't shy away from talking to a financial advisor or other trusted financial professional if you need to make sure that going back to work really will make the most sense for your situation.