Considering a Return to Employment post-Retirement? Steer Clear of These Three Typical Blunders
Returning to the workforce after retirement can be an exciting prospect, but it's essential to understand the potential financial implications. Here's a breakdown of how working after retirement can impact Social Security, Medicare, and taxes.
Social Security
If you decide to return to work before reaching your full retirement age (67 for those born in 1960 or later), your Social Security benefits could be reduced under the earnings test. For 2025, the Social Security Administration (SSA) deducts $1 in benefits for every $2 earned above $23,400. However, once you reach full retirement age, you can earn up to $62,160 with a $1 deduction for every $3 earned above that. After full retirement age, there is no earnings limit or benefit reduction[1][2].
It's important to note that you will continue to pay Social Security taxes (6.2%) on your earned income regardless of age, and these contributions could increase your future benefits through recalculations.
Medicare
Returning to work and increasing your income might raise your Medicare premiums, particularly for Medicare Part B and Part D, due to income-related adjustments. Higher income from working can push you into higher premium brackets[1]. For 2025, the extra expense for IRMAA (Income-Related Monthly Adjustment Amount) can range from $888 to $5,326.80 per year for Medicare Part B, and $164.40 to $1029.60 for Medicare Part D[3].
Taxes
Working after retirement may push you into a higher tax bracket ("tax bracket creep"), increasing the taxes you pay on your income, including on Social Security benefits. Up to 85% of Social Security benefits can be taxable depending on your combined income. Earnings from employment, withdrawals from traditional IRAs or 401(k)s, and investment income all factor into your taxable income and affect how much Social Security benefits are taxed[1][4].
You continue to pay Medicare taxes (1.45%) on wages, with no exemption after retirement age, adding to your tax obligations[2].
In summary, returning to work after retirement may reduce your Social Security benefits if before full retirement age, increase Medicare premiums, and raise your taxable income, potentially increasing income tax and Social Security benefit taxation. However, working after full retirement age does not reduce your Social Security payments but does require ongoing payroll taxes[1][2][4].
It's crucial to find a balance when deciding to return to work in retirement, considering the potential costs and gains. Judith Ward, the thought leadership director at T.Rowe Price, warns that if you are getting Social Security and you're not at your full retirement age, you might see a reduction in benefits[3]. Rose Niang, a financial planner at Edleman Financial Engines, advises running any job decision by a financial professional first[3].
Before accepting a job, it's recommended to run the numbers and weigh the upside and the downside, especially for high-paying jobs. Reentering the workforce could potentially cost more money than staying home. Required minimum distributions are part of your Modified Adjusted Gross Income (MAGI), which can impact your taxable income and Social Security benefit taxation.
Countless people return to the workforce after retiring for various reasons, including financial concerns and a desire for structure and purpose. It's essential to consider the financial implications of these decisions to make informed choices about your retirement.
[1] https://www.ssa.gov/planners/retire/ [2] https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-plans-faqs-regarding-employees#RetirementPlanFAQs-Employee-FAQ8 [3] https://www.forbes.com/sites/nextavenue/2021/04/19/if-youre-collecting-social-security-and-youre-not-at-your-full-retirement-age-you-might-see-a-reduction-in-benefits/?sh=66d091c435e8 [4] https://www.aarp.org/retirement/social-security/info-2020/social-security-taxes-on-benefits.html
- One should be mindful that working in retirement, especially before reaching the full retirement age, might lead to a reduction of personal-finance benefits from Social Security due to the earnings test.
- Returning to work in retirement could potentially increase Medicare expenses, personal-finance costs, and taxable income, particularly if one is receiving Social Security benefits, and it's advisable to consult with a financial professional before making such a decision.
