Financial Implications of Working in Later Life

After declining in early years of the pandemic, the percentage of older adults in the labor force is increasing. An estimated 21.9% of Americans age 65+ were working in 2022. 

In 2019, the older worker cohort included nearly 15% of those in their 70s. Reasons for continued work include a need for additional income (inflation), boredom, social contact, structure, and a sense of purpose.

Working longer brings financial challenges and opportunities. Below are 13 financial planning  factors to consider:

1.    Higher Social Security Benefit- This can occur three ways: 1. higher benefits payable at older ages due to delayed retirement credits, 2. higher earnings often paid to older workers, and 3. replacing low earnings from workers’ teens and 20s with higher earnings in later life.

 

2.    Tax on Social Security Benefits- Those who work and claim benefits will trigger taxes with a combined income above $25,000 (individuals) or $32,000 (married couples filing jointly).

 

3.    Social Security Earnings Limit- Those who claim Social Security before full retirement age will have their benefits reduced $1 for every $2 they earn over $21,240 (2023 limit).

 

4.    Continued FICA Tax- Like all workers, employed older adults must pay Social Security/ Medicare tax. If earnings replace prior years in a 35-year benefit formula, benefits will rise.

 

5.    Still Working Exception- Older workers who stay put can postpone required minimum distributions (RMDs) on a current employer’s plan under the “still working exception” rules.

 

6.    Continued Savings- Older workers who stay put can continue to put money in employer savings plans, often with matching, while entrepreneurs can make deposits to SEP accounts.

 

7.    Work Expenses- Costs, such as gas for commuting, continue for older employees. Older self-employed workers will incur expenses for office supplies and tools of their trade.

 

8.    Income in Lieu of Savings- Earnings from work can postpone withdrawals from retirement savings (e.g., $40,000 of earnings is equivalent to withdrawing 4% of a $1 million nest egg).

 

9.    Tax Bracket Triggers- When earnings are added to a pension, Social Security, RMDs, and other taxable income, planning is needed to avoid a higher tax rate or Medicare premium.

 

10. Tax Withholding Accuracy- With multiple income sources, accurate withholding is a must via payroll deduction, quarterly payments, and the safe harbor rules for under withholding.

 

11. Medicare Premium Tax Write-Off- Self-employed people age 65+ who are enrolled in Medicare Part B and D can deduct their monthly premiums against business income.

 

12. Employer Benefits- Workers age 65+ at large companies can still be covered by group health insurance, thereby postponing Medicare premiums. Other benefits also continue.

 

13.  Tricky Rules- Employers may have rules that prevent older workers from collecting pension benefits or former workers from returning as freelancers until a break in service.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.