What does your retirement look like in your mind? Are you relaxing on a warm sunny beach? Playing a daily round of golf? Traveling the country - or even the world?
Or are you still setting the alarm clock and going to a job you hate just so you can make ends meet?
Today, more retirees are going back to work because of inflation. This refers to the rate at which prices for goods and services go up over time. Inflation can also be deemed as a decline in your purchasing power because items you have purchased in the past cost more in the future.
By planning ahead for inflation, though, you could be better prepared for higher prices down the road. This, in turn, may reduce the chances of you having to go back into the workforce at a time when you should be relaxing and enjoying life.
Rising prices can make it difficult for many people to keep up their current lifestyle. But for retirees living on a fixed income, price hikes can be particularly difficult - especially over a long period of time.
Using an average inflation rate of just 3.2% over 20 years, your income would have to double in order to maintain the same lifestyle that you have today. So, for instance, if you are generating $4,000 per month right now, your incoming cash flow would have to grow to $8,000 just 20 years from now in order to “break even.”
Unfortunately, in this case, many people end up having to make tough decisions about what to give up. Doing away with a vacation home or a second vehicle is one thing. But having to decide between buying groceries or prescription medication is quite another.
Because of that, more retirees are finding that they must make drastic changes in their lives - one of which is going back to work so they can help fill in the financial “gap” between income and expenses.
While some retirees savor the idea of starting a new business or taking a job in a completely different industry after leaving their regular job behind, others are required to work because if they don't, they won't be able to pay their essential living expenses. There can be both benefits and drawbacks to going back into the workforce after you've retired.
Certainly, some of the positive aspects of working in retirement can include the following:
Earning income - even after you retire - can likely allow you to more easily pay your expenses. If your other retirement income sources, such as Social Security and a pension, are enough to cover housing, transportation, health care and other necessities, you could use these “extra” funds for other items, like travel, entertainment and fun.
Depending on the type of income that you earn, you could also continue contributing to your Social Security taxes that, in turn, may increase the amount of your benefits in the future. Likewise, more income could mean that you are able to add more to your personal savings and investments.
If you have a personal IRA (individual retirement account), you may use your earnings from work to contribute to that plan. Under previous IRS rules, traditional IRA holders had to stop contributing to these plans after turning age 70½.
But under the SECURE Act, which took effect in 2020, anybody of any age can make traditional IRA contributions. Plus, if the company you work for offers a retirement savings plan, it is possible that you could also make contributions to that and generate tax-advantaged growth. Any and all of these additional savings can give you a larger “base” with which to generate future income - and this can help you to keep up with inflation.
There are other, non-financial rewards that working during retirement may bring, too. For instance, you may have dreamed about starting a certain type of business after you retire from your “regular” job.
In addition, if you work with other people, there is a social aspect that can also come with going back to work in retirement. This can keep you more active and socially connected - which can mean better overall health and possibly even fewer medical issues.
While there are some positives to going back to work in retirement, there are also some items that you need to consider which could have a negative impact on your finances and your lifestyle. These can include the possibility of:
Many people are unaware that up to 85% of their Social Security retirement income benefits may be taxable. The amount of taxable Social Security income is based on how much taxable income you generate from other sources.
In this case, there are several factors that could make Social Security income subject to income tax. These can include the following situations:
Therefore, depending on your specific situation, you may have to pay tax on a percent of your Social Security benefits (in 2022), provided that you meet the following criteria:
The amount of your combined income is equal to your adjusted gross income plus any non-taxable interest earned, plus one-half of your Social Security benefits.
However, it may be possible to generate more income each year from Social Security to help with rising prices. This is because all Social Security retirement income benefit recipients are eligible for cost-of-living adjustments (COLAs) each year.
Even given higher monthly Social Security income, though, you may or may not be able to maintain a comfortable future lifestyle - especially if your health care needs increase and you require long-term care or other health-related services. Health care is expensive, and it tends to rise significantly with inflation.
Although these cost-of-living benefit increases are not guaranteed, the Social Security Administration has raised payments in most years since 1975. So, it is important to factor this possibility into your overall retirement income plan.
The income tax system in the United States is progressive. This means that the more income you generate, the more income tax you may be required to pay. And the more tax you owe, the less you will net out, or actually be able to spend on your needs and wants. Therefore, higher taxes can hinder your chances of beating, or even meeting, future inflation.
|Tax Rate %||Single||Married Filing Jointly|
|10%||Up to $10,275||Up to $20,550|
|12%||$10,276 to $41,775||$20,551 to $83,550|
|22%||$41,776 to $89,075||$83,551 to $178,150|
|24%||$89,076 to $170,050||$178,151 to $340,100|
|32%||$170,051 to $215,950||$340,101 to $431,900|
|35%||$215,951 to $539,900||$431,901 to $647,850|
|37%||Over $539,900||Over $647,850|
In addition, while the United States has been in a historically low tax rate environment for many years, this has not always been the case. In 2022, the top federal income tax rate is only 37%. But, since 1913, this rate has been as low as just 7% and as high as 94%.
The more money you owe to Uncle Sam, the less you will have available for keeping your income in line with the rising cost of the goods and services you need. With that in mind, it is essential to have a plan in place that reduces - or eliminates - tax so that you have more money to spend in the future.
Similar to with the benefits of working in retirement, there are some non-financial drawbacks, too. For instance, depending on the type of job you take on, it is possible that you'll have to follow a set schedule when the employer expects you to be there.
This could mean setting your alarm clock every day, driving in traffic to and from work, and wearing certain clothes (based on where you are working). So, getting a job after retirement could require you to relinquish some of your freedom.
Because of the various elements that are involved, working after you've retired may also cause added stress in your life. Deadlines, angry customers or any number of other situations could cause you to become anxious and stressed out.
So, while earning money from a job or business in retirement might help you to keep your incoming cash flow on pace with rising inflation, you have to ask yourself if all of the other elements are really worth it.
|Advantages of working in retirement||Disadvantages of working in retirement|
|More income to put toward living expenses||Social Security income could become taxable|
|May contribute more to savings and employer-sponsored retirement plan(s)||Might push you into a higher income tax bracket|
|Could fulfill a goal or purpose||May be required to follow a set schedule with less control over your time|
|Can provide a social element||Could bring about added stress|
While many people believe that a volatile stock market and low interest rates are threats to your future financial security, they aren't the only ones. Another significant risk is inflation - and the longer you live, the more this can impact your ability to purchase the items and services you need and want.
This is why it is essential to have a solid plan in place that addresses the issue of inflation so that you can move into the future without concern about having to drastically change your lifestyle.
Alliance America is an insurance and financial services company dedicated to the art of personal financial planning. Our financial professionals can assist you in maximizing your retirement resources and achieving your future goals. We have access to an array of products and services, all focused on helping you enjoy the retirement lifestyle you want and deserve. You can request a no-cost, no-obligation consultation by calling (833) 219-6884 today.