In today’s episode, you’ll learn more about:
- Social Security earnings limits
- ACA health insurance before Medicare
- Medicare and IRMAA considerations
- How working affects retirement tax planning
- Deciding whether working is financially and personally worthwhile
Listen Now:
The Smart Take:
More retirees than ever are choosing to work in retirement, whether for additional income, consulting opportunities, or simply because they enjoy staying engaged.=
In this episode, Tyler Emrick, CFA®, CFP®, discusses the financial planning considerations that often accompany returning to work after retirement.
If you’re thinking about working during retirement, this episode will help you understand the planning opportunities and potential pitfalls before saying “yes” to your next job.
Go Inside the Episode:
0:00 – Intro
3:36 – Social Security Earnings Test
8:29 – Health Insurance Before Medicare
11:38 – Medicare After Age 65
Learn more about the Retire Smarter Solution ™: https://www.truewealthdesign.com/ep-45-retire-smarter-solution/
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The Hosts:
Kevin Kroskey, CFP®, MBA – About – Contact
Tyler Emrick, CFA®, CFP® – About – Contact
Episode Transcript:
Tyler Emrick:
Retirement doesn’t always mean you’re done working. For some people, it’s about extra income. For others, it’s staying active, consulting, or simply doing something they enjoy. But going back to work can affect much more than your paycheck, today, we’re talking about some of the biggest financial planning issues to consider before deciding whether to go back to work makes sense for you. All coming up today on Retire Smarter.
Walter Storholt:
Hey, welcome back to another episode of Retire Smarter. I’m Walter Storholt alongside Tyler Emrick. As always, he is a chartered financial analyst, a certified financial planner, and one of the great wealth advisors on the True Wealth Design team. Tyler, it’s great to be with you once again and I’m excited for today’s topic because this is just a fun one to talk about. It sounds good on the surface to some people, it’s something that other people don’t want to do whatsoever. Others who do want to do it, it might not actually make sense for them to do it. Others who don’t want to do it, it might make a humongous difference in their financial life, so there’s all sorts of threads and layers to kind of break down.
Tyler Emrick:
Absolutely. Oh no, it’s a wonderful topic. I mean, the idea of, well, hey, what does retirement look like for you? And is it this hard cutoff, “Hey, I’m done working,” or is there this slow kind of progression in? I mean, what kind of prompted the topic? I mean, it’s one that comes up quite a bit on meetings, let’s be real there. But Kiplinger, I saw an article that came back that was just kind of talking about the amount of retirees that were going back to work after they were retired. I mean, the stat that they threw out was somewhere around one in five Americans age 65 and older were still working in some capacity, which okay, might not seem like a lot, but that’s double what it was in the mid ’80s. So okay, growing trend, right?
Walter Storholt:
And that doesn’t mean everybody who’s in that one in five is even retired, so it’s not one in five retirees necessarily. That could just still be people working at 65, right, full-time?
Tyler Emrick:
It could, absolutely. Well, and I think this is where that definition of retirement gets a little muddy. And what does it look like for you, what does it mean?
Walter Storholt:
Yeah [inaudible 00:02:12].
Tyler Emrick:
No, not at all. It was that, hey, you put in your time, you’re done, “Boom, I’m out.” But more and more that transition, like I said, just looks different. I mean, I was in a meeting earlier, just earlier this week when we were working with a family where we were doing that, a planning for retirement. They were looking to retire sometime early next year and the question that sometimes comes up that they threw out to me was, “Hey, does working mess things up in retirement?” They had started to have conversations with managers and the employers that they work with and inevitably this whole, “Well, hey, do you got to go right now? Could you come back in a limited capacity? Hey, could you be a consultant? How many hours could we get you to stay on?”
That often comes up, Walt, when you start talking to your team and your employers about, “Hey, I think I’m ready to go.” We see it quite a bit. So then it… Naturally for them, right? “Well, hey, is this even possible? I wasn’t even thinking about it,” they said. So it’s a question that often comes up. So we figured, hey, why don’t we just dive into does it matter? Does it mess anything up? What are some of the things that individuals and families need to be thinking about if they are going to do a slow transition into retirement? And yeah, I think if you find yourself in that camp, should be a pretty good episode for you to listen to for sure.
Walter Storholt:
Yeah, sounds good. So what are some of the things that… I thought their comment was interesting about, “Does that mess anything up?” So that must mean they were clued in at least to some extent of, “Hmm, maybe more income actually equals consequences.”
Tyler Emrick:
Consequences, exactly. Yeah, so the first couple things that came to my mind or generally come to my mind for this conversation evolve around those, “What could it mess up? What does more income drive,” to your point. And probably the biggest one would be Social Security. We all know Social Security is a big decision point. We talk about it quite a bit here on Retire Smarter. The way Social Security works is that depending on your age, there could be some earnings limits to where Social Security actually comes back in and starts to take away some of that Social Security. So this is that scenario, Walt, where you truly are, say, if you’re on Social Security and you’re not full retirement age… Remember, full retirement age for most of the listeners are going to be 67, for some, it might be a little less than that, but that full retirement age is when Social Security considers you to be, “All right, you are retirement age now.”
Anything before that, they get a little wonky and they don’t want you to maybe start double dipping. So if you earn too much money, there’s a calculation that they use where they actually, if you earn too much, they’ll just start taking away those Social Security payments, so you are truly giving up some from Social Security in that scenario. For those of you that maybe already started Social Security or planning to start Social Security as soon as you retire, that’s a pretty big decision point that you want to kind of think through if there is at all a scenario or a chance that you go back to work part-time or do some consulting work or whatnot, because you would give up those payments if you started them then.
Walter Storholt:
Yeah. Is this a shoot yourself in the foot kind of thing like, “Okay, I went back to work and I kind of messed up this earnings test a little bit, but then if I quit working next year, did I mess up all of my Social Security forever,” or is this more of just some temporary consequences?
Tyler Emrick:
It’s a temporary consequence, right? I mean, they’re looking at it on a year-by-year basis. Things change and I think it really goes to that old adage of building in some flexibility inside of your retirement plan. We start thinking about what retirement looks like and we’re focused on this initial early stage retirement and are you still working? But I mean, I would urge families to think about retirement and the context of having that flexibility throughout retirement, Walt. I mean, I don’t know how many times we have those conversation with families where they think one thing’s happening and then, hey, a couple years into retirement, opinions change, priorities change and they shift. And having that flexibility built in your plan or at least knowing some of these decision points, I think are extremely, extremely beneficial. So not only Social Security-
Walter Storholt:
And that’s a really good point, Tyler. I just want to piggyback off of that if I can for just a second, because I watched my parents go through this exact same thing. Both wanted to work in retirement a little bit just to create fun money. They just were like, “Hey, it’ll give us some extra fun money. We don’t have to, but it’ll just give us that little extra breathing room.” Dad worked on commissions a lot and bonuses throughout life, so he was used to just getting that extra little injection occasionally that was, “All right, this is what we’re going to use for vacation. This is what we’re going to use to go do this with.”
And so they wanted to kind of duplicate that a little bit. Mom, more for the reasons of just wanting to stay mentally stimulated and continue to use her skills, but they both found it very difficult in reality and in practice to actually execute. So for some people, it’s more that conversation and that issue. For others, it’s these higher level planning issues of, “Well, it’s going to mess up the plan in some of these other ways.” But again, another illustration of how it definitely impacts people differently.
Tyler Emrick:
Yeah. It’s a spectrum, right? It’s just not, “Hey, I’m getting more money, it’s better or not.” There’s a lot that goes into it, absolutely.
Walter Storholt:
They didn’t even get to this step of, “Okay, now does it make sense for us to do it?” They just kind of kept hitting brick walls of… It can be hard when you’re used to full-time and then try to duplicate that same job in a part-time basis, is one of the realities I think they faced.
Tyler Emrick:
I think it’s a very valuable thing to consider, to start talking about and thinking through what that transition looks like. It’s a lot tougher transition than maybe it seems like at the surface level when you start thinking about all of these things that your job and your employer and your team that you work with there gave you from all sorts of different aspects, whether it be social, income, saving, that type of thing. I mean, it is truly a pretty big transition, right? The other caveat here, we hit a big one, Social Security. The other one would be your benefits and benefits changing and specifically healthcare. Because a lot of times when you come back to an employer at a part-time capacity, what happens is, well… Or even a consulting capacity where maybe you’re a 1099 employee. Well, a lot of times those benefits go away.
The benefit that really is applicable in this situation or this scenario would be healthcare. It’s like, well, hey, if you’re before 65, you’re retiring, going to go back and do some consulting work where, hey, that employer used to cover your healthcare. Now they don’t because you’re at a consulting capacity. Well, where are you going to go to get that healthcare and what does it look like? As we know from many of the podcasts that we’ve done in the past, your income can really drive a lot of what you pay in healthcare cost pre-65 because of these ACA premium tax credits that are afforded to you based off your income.
So if you’re kind of getting that double whammy, Walt, where you’re like, “Hey, I’m cutting my hours back, I’m losing my benefits, but I’m still making enough to not be able to start Social Security, and hey, I’m giving up some of these healthcare subsidies that I would otherwise get if I could live off other assets,” because that income, it’s hitting your tax return, well, hey, you could find yourself in that situation where, “All right, is it worth it? Is the juice worth the squeeze? What am I getting out of, from a value standpoint of going back in and doing this employment?” Because that healthcare is a huge decision point that a lot of retirees pre-65, you’re going to have to figure it out. And you’re going to be on your own if you’re not maybe working full time or not having those benefits afforded to you through your employer.
Speaker 3:
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Walter Storholt:
Yeah, you take all these cuts and you’re doing all this work and you’re going home with $100, might be, like, “Wait.”
Tyler Emrick:
Correct. Well, and I would lean-
Walter Storholt:
It’s so low, then what’s the point of doing all this? Yeah.
Tyler Emrick:
What’s the point? Yep, exactly. Well, and two, when you think about even going back as a contractor, well, that could solve a lot of these issues, right? Well, then you got to think about, “Well, how much should I get paid as a contractor to kind of equal out what I was getting as W2,” right? “I have these extra payroll taxes I got to worry about, I’m not getting my 401k matched anymore. Maybe I got to pay a little bit more than I otherwise would for healthcare.”
Walter Storholt:
I got to do quarterly taxes or something.
Tyler Emrick:
Yeah, yeah. Got to estimated tax payments, yep. So your advisor that you’re working with should be a wonderful resource for you to kind of help equalize that as you’re contemplating and thinking through some of these decisions to help say, “Well, hey, if I was making X amount per hour as a W2 employee, to even consider it to kind of be at a breakeven and be back, I need to be making this,” and what goes into that calculation. And now again, going back to your point on saying, “Hey, what’s the why behind going back to work, maybe it’s not all just financial,” but if it is, understanding some of these key decision points are going to be pretty key, pre-65.
Walter Storholt:
You’ve got to weigh that.
Tyler Emrick:
Oh, you do, absolutely. Well, and it could work on the flip side as well, right? I mean, even if you’re looking at your healthcare and considering it and you’re older than 65, you do have a little bit of it figured out because, hey, at least you can go on Medicare. You don’t have to worry about these tax subsidies, you don’t have to worry about what healthcare plans are available in your zip code and is your docs in network and some of these things. Again, one thing that I do want to mention before I jump on to Medicare, because I do think it’s important, if you find yourself in that situation where you are considering going back as a contractor, keep in mind too, there are some other healthcare plans that are potentially available to you.
Here in Northeast Ohio, the Chamber of Commerce, they partner with small business owners that are set up appropriately, depending on what that contract looks like to where you can partner with some of the local healthcare systems and get pretty reasonable healthcare. And you don’t have to go through that individual healthcare system and the ACA tax credits and things, too. So thinking about what capacity you’d be going back to work is very important and has really helped drive some of these decision points. But as we think about healthcare after 65, well, when we start adding income, now we got to start thinking about, “Well, what does that do to my Medicare premiums? Am I going to fall into that IRMAA care bracket and do we need to be worried about what this extra income is doing for us?”
The big caveat there too, is when you do transition into retirement or maybe cut down your hours, we always want to keep in mind that if you’re going on Medicare, you are still going to be able to use those as qualifying events to maybe appeal those IRMAA charges if they are coming back. Remember IRMAA, that’s where they increase your Part B premiums based off the amount of income that you make. So if you make too much, they go ahead and they start increasing what that Medicare Part B cost is going to run you. So when you’re starting to transition into retirement, cutting down work, changing jobs, maybe going into full retirement, we can use those events, those qualifying events to kind of appeal some of those higher costs and we want to kind of keep that in mind. Use that, don’t just go ahead and assume, “Well, hey, I kind of semi-retired, my income’s still going to be high. I’m just going to have to eat that extra cost.”
I think that’s a very granular situation, but if you find yourself into it, you definitely want to be mindful of it when you think about it. Social Security and healthcare, I think those are the two big items that families need to be top of mind to be thinking of if you’re thinking about going back to work. But Walt, I think it really also goes back to that whole bigger question too, of, well, what’s the why behind it? What do you want that retirement to look like and is going back to work in some capacity going to fulfill what that story looks like and get you to a better spot? I kind of look back on some of the families that I work with. There’s an individual, she always pops in my mind on this situation because she was always trying to retire. She’s said, “I’m retiring early. I’m getting out, I’m done. 58, I’m out, 58, I’m out.”
And I was like, “Okay, get it, yep.” We built a plan around it, it was awesome. She retired at 58 because this was more than a handful of years ago now, and then no less than a year later she’s like, “You won’t believe this, but I got this job that just kind of fell in my lap. It’s too good to pass up. I’m literally working from home, I go in once a week. They’re going to pay me this crazy amount of money and they’re going to offer me some healthcare.” Wasn’t even on her radar at all, but she’s like, “I think I’m going to do it. I like the people that are there.”
Walter Storholt:
Yeah.
Tyler Emrick:
She did it for a couple years and was like, “All right, hey, I’m done.” She actually then did her second retirement and well, I’ll tell you what, no less than a year later, she comes back and says, “You’re not going to believe this, but my church, I got another opportunity. They want me to kind of come back. I’m going to work, it’s going to be under my own terms. I like the people that I’m working with.” So for her, I mean, that whole scenario of, “I’m done early, I’m getting out.”
And now here we are almost six, seven years into retirement and she’s had two other roles and she’s currently working in one right now and it’s just a fascinating story, but she’s always done it on her own terms, that’s the key. It’s always been a, “Hey, it’s too good to pass up. I enjoy it, I enjoy the work that I’m doing, I enjoy the people.” There was something else there on the side. It wasn’t just like, “Hey, I need to make this money.” Did it help the plan? Heck yeah, it did.
Walter Storholt:
Sure.
Tyler Emrick:
Anytime you can bring more money into the plan, hey, you’re making it. Okay, yeah, you’re going to pay a little bit more on taxes maybe, but you’re still earning quite a bit more than what was put inside the plan. So her plan certainly is looking more better and better and better and it’s helped that, but really, that wasn’t the crux of the why. The why was, hey, other things that fit into what she was trying to accomplish from a retirement standpoint.
Walter Storholt:
You hit a really important part and it’s a great one to end on. Yes, we talked about some consequences of going back to work and some things that might ding, but that’s not to say that it doesn’t move the needle to bring more money in. It’s very, to me, equivalent of people being like, “Ooh, well, I don’t want to sell this stock for a gain because I’m going to owe taxes on it.” It’s like, but that’s okay. In some cases, that-
Tyler Emrick:
Hey, well, talk to us, see if we can save some of those taxes.
Walter Storholt:
That’s right, that’s right.
Tyler Emrick:
But to your point, yes, absolutely.
Walter Storholt:
But to the point, don’t not harvest a gain if it’s the appropriate thing to do just because you’re going to pay taxes on it. So don’t not go back to work just because it might have some consequences. We just want people to be aware of those consequences and where the net might come out, where the trim is, where it might make sense to cut back on certain amounts, or just whatever the case may be. But yeah, I didn’t want to discourage people from going back to work if it’s something they want to do.
Tyler Emrick:
Oh, 100%. And well, knowing about these things, you can plan for them, you can plan around it, you can work around. Anything that we just brought up, there are outs and things to, I don’t want to say manipulate because that makes it sound bad, but there’s levers that we can pull to kind of make it work for your situation.
Walter Storholt:
Also a great point that you can do a retirement plan and then redo it and then redo it again and then redo it one more time.
Tyler Emrick:
Yep, got to kep us employed. Come on, Walt.
Walter Storholt:
That’s right. Retire as many times as you want, then go back to work and retire again. We’ll do a new plan every time, right?
Tyler Emrick:
Yeah. Well, and it goes back to this, things change. Family dynamics change, your priorities change, it’s not so set. And all the time I’m harping on building in, build that flexibility into your plan. Build it in there. It’s part of the reason why some of these big annuities, when you buy them and you’re fixed and you’re in there or you start making some of these big decisions that lock in your money or something like that, you just want to kind of be a little more careful about that, right? That optionality and that flexibility is tremendous as you start thinking about a long, happy, healthy retirement.
Walter Storholt:
Hey, great points, Tyler, all across the board. Good conversation today. We use the word plan a lot. And so if you’ve not gotten a financial plan before, if it’s been a while since you’ve checked in on it, if you’ve done it yourself but you’re not quite sure if it’s going to be successful in retirement, if you’ve done a plan with another advisor, but maybe you’ve lost communication or you’re not sure if it’s the best fit for your situation, that’s where the True Wealth Design team often comes in. They can review that plan with you, see what are the best next steps to take and really look at all of the different planning angles. We’ve hit on just a couple of tiny little angles of the financial plan on today’s show, but it goes way more deeply than that when you meet one-on-one and truly look at the numbers together and talk about what you want out of retirement and your future life goals.
If you’d like to set up a time to meet to see if you’re a good fit to work with one another, so not to go through the entire planning process right out of the gate, but just to have an initial conversation, it’s very easy to do that. You can go to truewealthdesign.com, look for the Let’s Talk button, or just click the link in the description of today’s show. That’ll also take you to where you can schedule that 20 minute conversation, see if you’re a good fit to move forward with one another and then go from there. It’s a great first step that most people take and start with, so check that out. Again, link in the description of today’s show or go to the website, truewealthdesign.com. Tyler, great episode today. Thank you so much and we’ll talk with you again soon.
Tyler Emrick:
Absolutely.
Walter Storholt:
All right. We’ll see you again right back here on Retire Smarter. Thanks for joining us.
Speaker 4:
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