2 Pros and 3 Cons of Working in Retirement | personal finance

(Katharina Brock)

To work or not to work? As you approach retirement age, maybe that’s a question you’re asking yourself.

Having a job in recent years has benefits, but it’s not a universally good solution. To help you decide if work-related retirement is right for you, here are two pros and three cons to consider.

Pro: Your health can benefit from it

Several studies show an association between working in old age and improved cognitive function. The basic theory is that work provides mental and social stimulation and this activity can keep you happier and more alert into your older years.

These health benefits are likely to be more pronounced if you don’t have an active friend group or hobbies that you enjoy. On the other hand, if your current job is emotionally draining and time-consuming, the work stress can negate the benefits.

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Pro: Your savings can last longer

Earning a paycheck should take some of the strain off your savings. If you can continue to contribute to your retirement account and defer your Social Security, you’ll benefit in three ways:

  1. A larger portion of your savings stays invested and working for you.
  2. Ongoing contributions increase your share numbers and increase your future earnings potential.
  3. If you delay social security, your old-age pension will increase. This is the trade-off for forgoing income up front.

Cons: Working may not fix a savings gap

Finances are a common reason seniors keep working after retirement. Unfortunately, continuing to work is not a safe solution for a gap in savings.

Continuing could even backfire. This can happen when there are unresolved issues that caused you to not save enough. If you spend more than you take in, don’t make saving a priority, or don’t master the art of budgeting, earning a paycheck is just a temporary patch.

If you can no longer work, chances are you still don’t have enough savings – and not a great solution to fix the problem.

If money is the reason you’re choosing to work in retirement, be honest with yourself about why you’re underfunded. Fix these issues while you continue working. That gives you a better chance of enjoying a traditional retirement without a major lifestyle downgrade.

Cons: Your Social Security may take a hit

If you work before full retirement age (FRA) and collect Social Security, you are subject to income limits. Make more than the threshold and your advantage will be reduced.

Social Security uses two formulas to calculate penalties:

  1. In the years that you have not yet reached FRA, your benefit will be reduced by $1 for every $2 that your income exceeds the limit. The limit may change from year to year, but in 2022 it is $19,560.
  2. In the year you reach FRA, your benefit will be reduced by $1 for every $3 earned over a higher limit. In 2022, that limit is $51,960.

You can avoid the deductions by keeping your income below the exemption limit. Or — that’s sometimes a better strategy — work enough so you can defer your Social Security to FRA.

Disadvantage: You delay full retirement

Traditionally, retirement means doing all the things you couldn’t do in your working life — hanging out with friends, taking up new sports and hobbies, and traveling. Work can fund these activities somewhat, but you give up your free time in the process.

Your time is valuable, especially when your health is declining. Procrastinating on your bucket list experiences can be disappointing—possibly more disappointing than downsizing your life now so you can live without your paycheck.

To work or not to work

Working in retirement is far from ideal if you have a stressful job, are on social security before FRA, or have ailing health. It’s also problematic when the ongoing paycheck allows you to ignore your worst financial habits.

The other side is that if you are happy with your job and healthy you could be a great candidate to continue working in retirement. Use the time to practice living within a budget while shore up your finances. That way, when you hand in your last pink slip, you’ll have more funds for the retirement lifestyle you want.

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