Unretirement and encore careers: The new normal?

Key Points

  • Working past traditional retirement age is so common nowadays that “encore career” has become part of our national vocabulary.

  • Chris Farrell, Senior Economics Contributor for American Public Media’s Marketplace, explores this phenomenon in his book Unretirement: How Baby Boomers Are Changing the Way We Think About Work — a guide to the oncoming societal shift brought about by the aging of America’s workforce.

  • Working in retirement may put you in a different tax bracket and could have an impact on your Social Security benefits so you’ll want to sit down with your financial and tax advisors to understand the implications.

What’s behind this movement? And what could it mean for you?

Unretirement author and financial commentator Chris Farrell on why the traditional retirement model is changing for so many.

Aside from economics, what is driving Americans' work in retirement?

For one thing, the baby boom generation is healthier and better educated than previous generations. They also value the social aspect of work. And for many, the skills, the knowledge, the experience they’ve gained over time are a big part of who they are. More people are learning they don’t want to walk away from that identity completely.

Are there employment options geared toward older professionals?

A number of companies recognize that retirees have a lot of knowledge and skills, and know how the organization works. So some companies, like YourEncore, have set up networks of experienced retirees. In the tech sector, companies are setting up some interesting phased retirement programs. The federal government recently finalized the rules on its own phased retirement program. You commit to work 20 hours a week, and you can partially draw on your pension. This is going to be a closely watched program by corporate America, because if it succeeds—and I think it will—it will provide a template.

How can workers become more engaged in preparing for retirement?

Start thinking about “What is it I want to do next?” and add that into your retirement planning. The reality—particularly for higher-income workers—is that there’s not a whole lot of time for introspection while they are still in their job. In a sense, retirement is becoming a sabbatical, a period of time to decompress and think about who we are, what we are and what skills we want to tap into next.

In 2017, 26% of all new businesses were formed by people between the ages of 55 and 64.1

Additional considerations when it comes to working after retirement

  1. Will you need to supplement your income?

    “The first thing to ask is: Will you need to replace 100% of your current income, or will you be able to scale back?” says Dennis Mashuga Senior Manager of Financial Planning Advanced Advice at Ameriprise Financial. “Many can reduce their living costs after leaving regular employment, but you’ll want to sit down with your financial advisor and work through different scenarios.”

    If you end up working part time, consulting or starting your own business, you can still draw on your retirement savings to supplement your income. “As long as you are 59 1/2 or older, there are no tax penalties for taking distributions from your retirement portfolio,” Mashuga says.

  2. How will it impact your Social Security?

    If earning an income allows you to delay taking your Social Security, the payoff can be considerable. According to the Social Security Administration, benefits are more than 75% higher at age 70 than if you begin collecting at 62 (the earliest age you can file).

    If you decide to take Social Security to supplement your income prior to your full retirement age2, keep in mind that doing so could reduce your benefit. For example, if you are collecting Social Security retirement benefits before full retirement age (FRA), your benefits are reduced by $1 for every $2 you earn over the limit. For 2018, this limit on earned income is $17,040 ($1,420 per month). If you reach FRA during 2018, $1 from your benefits for each $3 you earn above $45, 360 will be deducted, until the month you reach full retirement age. Once you reach full retirement age, there is no limit on the amount of money you may earn and still receive your full Social Security retirement benefit.

  3. What are the tax considerations?

    Up to 85% of your Social Security income is subject to taxation by the federal government, and some states also tax benefits. “Additional earnings could affect the amount that is taxed, but good income planning may allow you to reduce or mitigate that impact,” Mashuga says. “For example, if you have extra income and meet all the eligibility requirements, you may be able to use your employers’ salary deferral plans or IRAs to reduce your taxable income.”

    Working past traditional retirement age might also put you in a different tax bracket than without the job, so it’s wise to make sure your portfolio is appropriately balanced between tax-deferred and taxable investments.

    “In short, you’ll want to sit down with your financial and tax advisors well in advance and look at your long-term picture,” Mashuga says. “Taxes can be complicated, so it’s best to look five or 10 years out for your retirement income distribution planning.”