After spending decades in the workforce, many people look forward to retirement. However, by redefining “retirement” to include part-time work or consulting, some retirees enjoy exercising skills, meeting new people and receiving key financial benefits.
Paychecks during retirement can help in these areas:
- Additional contributions. If you contributed to an IRA while working, you might think those days are over. But there’s no
age limit on contributing, so if you have any earned income, you can contribute to an IRA and boost your retirement resources. - Withdrawal rate. Once retired, you’ll likely need to rely on your investment portfolio to provide some — or most — of your income. Consequently, you’ll need to establish an appropriate withdrawal rate — a percentage of your portfolio that can be taken out annually without running the risk of outliving your money. Income from part-time work might lower your dependency on investment income, thereby reducing your annual withdrawal rate and extending your portfolio’s longevity.
- 529 plans. Earnings and withdrawals from 529 education savings plans are federally tax-free, provided the money is used for qualified education expenses. To help with their grandchildren’s education, grandparents can contribute some of their earned income to a 529 plan, which funds college, as well as trade schools and K-12 expenses in some states.
- Reduce debt. By retirement time, you might have paid off your mortgage, but you might have other debts on the books. If you can apply some of your earned income to these debts, you can improve your cash flow and possibly avoid dipping into your retirement accounts for short-term needs.You should consider any issues of working in retirement, particularly if you bring in a sizable amount of money. If you’re earning income and collecting Social Security before you reach your full retirement age — which, likely, is between 66 and 67 — monthly benefits will be reduced. But these “lost” benefits will be restored at your full retirement age.
Also, added income could push you into a higher tax bracket or cause you to pay the Medicare premium surcharge or the 3.8% surtax on net investment income if your income reaches certain levels. Before pursuing employment that could yield a large additional income, consult your tax advisor.
This article was written by Edward Jones for use by your local Edward Jones financial advisor. Edward Jones, member SIPC
– Roberto De Jesus is a financial advisor for the Edward Jones branch on Cedarcrest Road in Acworth.
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