The traditional face of retirement continues to change. No longer can the average worker count on a defined pension plan to fund retirement. Social Security is estimated to become insolvent in 2034, and surveys show many workers are not saving enough on their own.
Beyond that, people are living longer and health care costs are increasing at more than twice the rate of inflation, says Ann Minnium, certified financial planner and principal of Concierge Financial Planning in Scotch Plains, New Jersey.
“A long-term care event could decimate the finances of most Americans, impoverishing the surviving spouse,” she says.
A part-time job in the early years of retirement could be the solution.
“I have had several clients whose retirement plans were successful due to their willingness to work part time,” Minnium says. “The part-time income was the missing piece that completed a seemingly unsolvable puzzle.”
[See: 13 Tips for Singles Nearing Retirement.]
There are both financial and personal benefits to incorporating a part-time job, at least in the early years of retirement. Notably, having a part-time job can shield a client from longevity risk, says Paul C. Bennett, managing director of United Capital, headquartered in Newport Beach, California.
“This is the risk, due to medical advances and improved health care, that you live too long and outlive your money,” Bennett says.
Many retirees imagine a relaxing, stress-free life after retirement, Minnium says.
“The reality is that many get bored and want to be useful in some way,” she says. “Research has shown that the longer people work, the longer they live. Research has also shown that working can keep the mind sharp and reduce the likelihood of dementia. Part-time work can be a great way to meet new people and can enhance a retiree’s social life.”
Contrary to the belief that companies don’t want older employees, many firms are specifically looking for older workers who offer innate abilities and relevant expertise, Bennett says.
“Some options to consider would be returning to your previous field in a consultative capacity or expanding your horizons into a completely new area in which you have an interest,” Bennett says.
Another big benefit to part-time income in retirement is that it gives you options. Part-time work can help retirees weather the storms of bear markets, says Jessica Landis, director of financial planning at Janney Montgomery Scott in Philadelphia.
“One of the biggest challenges retirees face is withdrawing from their accounts when markets are down,” she says. “Sound advice is to have a cash fund to pull from and allow your investments to recover, but not everyone has that luxury. Working part-time allows people to decide when to take from their accounts or when to give their accounts the ability to recover.”
A common recommendation is retirees should have six to 12 months of cash on hand to meet their expense needs above what their guaranteed income sources, including Social Security and pensions, will provide, Landis says.
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Income from a part-time job can also fund some extras. Some people struggle with the reality that when you have a big expenditure, there is not an income source that can replenish those funds, Landis says.
“Working part time can allow you to splurge on things early in retirement like taking a nice vacation or completing a home renovation without feeling as guilty or jeopardizing the health of your portfolio,” she says. “Large withdrawals from portfolios in the early years of retirement can have a serious impact on whether or not someone will be successfully retired.”
There is an ideal order in which your retirement assets should be withdrawn. If you get a part-time job, it could make sense to have the income earned from that job augment your current cash flow requirements to lessen the need to withdraw assets from your portfolio, Bennett says. It is important to consider the tax ramifications as well.
“It could be more tax-efficient to defer taxes on your current income by contributing to a retirement plan such as a 401(k) or SEP IRA,” Bennett says. “In this scenario, your portfolio withdrawals would then initially likely come from your nonqualified — taxable — accounts as opposed to your qualified — tax-deferred — accounts. You’ll eventually need to start drawing down your qualified assets once you reach age 70½, as the government requires these required minimum distributions.”
There could be some impact on your Social Security benefits. If you earn income over a certain limit by working after you begin receiving retirement benefits, your benefit may be reduced proportionately, Minnium says.
“This limit, known as the retirement earnings test exempt amount, affects only beneficiaries under normal retirement age,” she says. “The benefit reduction is based on your annual earnings and is not permanent. Your monthly benefit is reduced starting in January of the year following the year you had excess earnings and will be reduced until the excess earnings are used up.”
This year, the benefit is reduced by $1 for every $2 of earnings in excess of $15,720, Minnium says.
“In the year you reach full retirement age, a different limit applies,” she says. “The limit in 2016 is $41,880, which applies to earnings up to, but not including, the month you reach normal retirement age.”
Despite these rules, a part-time job can still can work in your favor.
“If your monthly benefit is reduced in the short term due to your earnings, you’ll receive a higher monthly benefit later. That’s because the SSA recalculates your benefit when you reach full retirement age and omits the months in which your benefit was reduced,” Minnium says. “Post-retirement earnings can also increase your Social Security benefits, which are based on your lifetime earnings. So if you continue to work after you start receiving retirement benefits, these earnings may eventually increase your retirement benefit.”
Putting it all together, the financial and personal benefits from part-time work in retirement add up.
Today’s retirees have watched their parents live longer than they may have expected, and they want to stay active in retirement, Landis says.
[Read: How to Cope With 3 Common Retirement Emergencies.]
“Retirees are now looking to volunteer, consult a few days a week or work doing something they really enjoy,” she says. “Others know that they will not be able to fully retire without working but are open to what can make slowing down a reality for them. With increasing longevity, people are more open to alternative retirement plans than retirees of the past.”
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