The stereotypical retirement featuring a leisurely morning cup of coffee followed by a round of golf or fishing all day is not for everyone. For some, the assets they’ve accumulated in their pre-retirement years aren’t enough to support that lifestyle. Others quickly find themselves unmotivated by the lack of employment; in short, they get a part-time job because they’re bored!
Partial Retirement Gains Popularity
Partial retirement is increasingly seen as a viable option for those who no longer wish to subject themselves to the daily grind of a full-time career, but who don’t want to — or can’t — exit the workforce entirely. Some employers have even begun experimenting with partial retirement for their existing workforce.
Instead of having to quit and find a part-time job, employees can instead dial back their commitment to their current employer, moving into a lesser role while keeping some pay and benefits before fully retiring. If you are thinking about partial retirement, it’s important to consider all the relevant factors before you commit.
Most people assume Social Security income is tax-free. While that’s often true, there are circumstances that can result in your Social Security benefits being taxed. When Ronald Reagan signed legislation making Social Security taxable in 1983, specific income limits were put into place.
Those making a combined income of more than $25,000 per year for single filers, or $32,000 per year for joint filers, would owe taxes on their Social Security income. “Combined income” includes tax-exempt interest income, your adjusted gross income, plus half of your Social Security benefits.
If those three income sources exceed the limits, you would owe taxes on 85% of your Social Security benefits. The problem today is that those income limits have not changed since they were first put into place 40 years ago.
$25,000 in 1983 is the equivalent of more than $70,000 today, which means income limits have effectively been drastically lowered since they were established. This in turn means more Social Security recipients are subject to taxes on their benefits.
Because many people don’t realize Social Security is taxable, and they are unaware of the low income thresholds which trigger those taxes, they often don’t withhold taxes from their Social Security benefits. This commonly results in new partial retirees with income from part-time work being hit with a large, unexpected tax bill.
Medicare is another area where having a post-retirement income can impact your finances. Medicare Part B and D premiums increase if your income is higher than certain limits. These limits are bracketed to income ranges. Higher income brackets pay higher premiums.
For example, if you earn $97,000 or less in a year, your monthly Medicare Part B premiums for 2023 will be $164.90. Earning just one dollar more per year would increase that monthly premium to $230.80! This is clearly an example of how making more money can actually cost you money!
If you’re on the threshold of a Medicare income bracket, it’s important to calculate how much more you will pay in premiums and whether the income from a part-time job would shift you to a higher bracket. That could potentially cost you more in premiums than you make from the job.
A third example of how additional retirement income can cost you money is capital gains taxes. Many retirees sell assets to fund their retirement. If those assets appreciated since they were purchased, capital gains taxes come into play.
As with income taxes and Medicare premiums, capital gains taxes are bracketed to income ranges. Individuals making less than $44,625, or joint filers making less than $89,250 in 2023, enjoy a 0% capital gains tax rate. Those earning more will pay a 15% tax or in some cases for particularly high-earners, 20%. Income from a part-time job will count toward those limits and could subject you to extra taxation.
Partial retirement isn’t as simple as deciding you want to work part-time while you’re retired. The factors influencing your financial health in partial retirement are complicated and require careful analysis. At Asset Preservation Wealth & Tax, we use cashflow modeling to determine the likelihood that various retirement options will be successful. We test factors, including earned income from working while retired, to make sure there aren’t pitfalls that could reduce your chance of a successful retirement.
When considering partial retirement, it’s important to work with an experienced advisor who is not only a fiduciary, but who also has a deep understanding of taxation. I regularly advise clients to retire from their full-time jobs. If a client is unhappy at work and experiencing so much stress that the quality of their life is lowered but isn’t quite ready to leave the workforce entirely, it’s good to explore options for partial retirement.
It’s entirely possible to retire from a full-time career, collect Social Security and find another job that makes you happier. However, it’s important to do so only after working with a financial professional to consider all of the factors that can impact your finances.
Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.
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