The Retiree's Guide to Going Back to Work

Just 40 days after retiring from the NFL last winter, celebrated quarterback Tom Brady announced that he would return to the Tampa Bay Buccaneers for another season after all, citing his competitive spirit and unfinished business on the field.

Like Brady, some retirees are so drawn to their work that they can’t stay away for long. They may crave the sense of purpose or human interaction that a job can provide. And while Tom Brady doesn’t have to worry about running out of money, many retirees want to supplement their retirement income with a paycheck.

Lately, there’s been an uptick in the percentage of folks who “unretire.” In May 2022, 3.4% of people who said they were retired a year earlier had returned to work, according to the Indeed Hiring Lab, which provides research on the labor market. It’s not a staggering figure, but it’s an increase from the 3% average from 2017 through 2019.

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What's Behind the Trend?

A tight labor market is one factor. In the spring, there were nearly two available jobs for every unemployed person. Employers are dangling incentives such as higher starting wages and signing bonuses to draw qualified candidates. And although ageism can still be an issue, employers are looking at older, experienced workers more favorably than they did in the past, says Chris Farrell, author of Purpose and a Paycheck: Finding Meaning, Money, and Happiness in the Second Half of Life. Rather than wonder when older workers are going to retire, managers are more inclined to think about how to keep them on the job, he says.

High inflation and a rocky stock market may also be luring some retirees back to work or encouraging preretirees to work longer. When your dollars don’t stretch as far, adding income can help cover expenses more comfortably.

“Filling up part of your income need with some part-time work can be a really good thing at this time, especially if you enjoy doing it,” says Jason Hamilton, a certified financial planner in Orange, Calif. Earning a paycheck can also help retirees delay withdrawals from their retirement and investment accounts.

That’s especially helpful if the stock market is down in your early retirement years. Pulling money from your portfolio while it’s losing value in a market swoon presents what’s known as sequence-of-returns risk. If your account balance shrinks significantly, you have fewer assets to create returns during market recoveries, posing the threat that you’ll run out of money in a retirement that could last decades. “Going back to work or continuing to work is one of the most effective ways of mitigating longevity risk,” says Jeffrey Levine, a CFP in St. Louis.

As restrictions related to the COVID-19 pandemic lift and vaccines protect against severe illness, those who dropped out of the workforce to avoid contracting the virus may feel more at ease returning to the office or picking up a retail job. But if you’d rather avoid in-person contact, the rising prevalence of remote work provides greater opportunity to stay home and collect a paycheck.

Some of those who were forced out of their jobs by economic or other circumstances are going back to work, too. Falling back on skills from a similar job earlier in his career, John Bramhall, 69, began working as a medical transcriptionist last year after a hiatus from work. Previously, he was an actor, but he lost acting jobs because of economic and social conditions in his area, and finding acting work was difficult when the pandemic shuttered stage productions. His wife had stopped working after she suffered a stroke in 2018, leaving him as his household’s sole wage earner. He has been collecting Social Security benefits since age 62, but “I could see I was going to have to do something again. We weren’t going to make it financially,” says Bramhall, who lives in San Francisco. He commutes to a medical office four days a week and works about 25 hours weekly.

Working at retirement age comes with special financial considerations, such as managing Social Security payments, deciding how to contribute or withdraw from retirement accounts, and weighing health insurance options. Whether you’re extending your stay in the workforce or thinking about dipping back in after retiring, keep these issues in mind.

Social Security

If you’re not yet receiving Social Security checks, earning income in your sixties may enable you to wait longer before you start taking benefits. Generally, you can claim Social Security as early as age 62, but you’ll receive up to 30% less in each check than if you wait until your full retirement age, which is 66 for those born between 1943 and 1954 and gradually rises to 67 for those born in 1960 or later. For each year that you postpone benefits after your full retirement age up to age 70, your checks increase by 8%. In addition, “if you earn enough in those extra years, you might improve your benefit calculation. Your benefit is based on your highest-earning 35 years, and if you can bump off a lower-earning year, you’ll improve your benefit,” says Justin Pritchard, a CFP in Montrose, Colo.

If you’re receiving Social Security and earning income from work before you reach full retirement age, your benefits are subject to the earnings test. In 2022, Social Security withholds $1 in benefits for each $2 a worker earns over $19,560. In the year you reach full retirement age, Social Security holds back $1 in benefits for each $3 you earn above a certain threshold—for 2022, it’s $51,960. The good news is that the withheld benefits aren’t lost forever: The month you reach full retirement age, the earnings test vanishes, and your monthly check is adjusted so that you’ll recoup the forfeited benefits.

Regret your decision to take benefits early? You may have a shot at a do-over. Within the first 12 months of claiming benefits, you can withdraw your application. You’ll have to pay back to Social Security the benefits you’ve received, but when you start benefits again, you’ll receive larger checks, as if you had never claimed benefits previously. If withdrawing your application isn’t an option, an alternative is to suspend benefits once you reach full retirement age. You’ll qualify for delayed-retirement credits of 8% a year, up to age 70.

Pensions and Retirement Accounts

Drawing on a pension provides some workers the financial security to retire from their first career and take on a new challenge in a second act. That’s what Kurt Baze, 57, did after he retired in 2015 as an elementary-school principal in Oklahoma. He had long dreamed of becoming a National Park Service ranger, and he and his wife, DeeDee, plotted out the financial implications of Kurt transitioning to a new career. With the pension as a foundation, “we knew we weren’t going to be destitute,” says Kurt. They also had a Roth IRA, a life insurance policy and a health savings account to fall back on. They decided to move to Colorado, where Kurt began volunteering at Rocky Mountain National Park. DeeDee took a full-time job at a credit union to provide income and health insurance.

Kurt was soon hired as a part-time seasonal ranger for the park, and then he moved to full-time work, which provides health insurance for the couple now that DeeDee has her own business as a financial planner. Kurt manages the park’s Junior Ranger program as well as programming for school trips to the park. He’s a good fit for the job thanks to his background in education, and leaving behind the stress of his previous work has benefited his mental and physical health.

The pension that Kurt is collecting from his teaching career provides payments for the rest of his life, with DeeDee receiving 100% of the benefits if he dies first. And when Kurt retires from his park ranger job, he will be eligible for a second pension from the federal government. Working for a new employer shouldn’t affect a pension you’ve earned from a former job. But if you go back to work for a company from which you’re already collecting a pension, check its rules. It may halt payments while you are working, or it may allow you to take full pension benefits at a certain age when working. Working a few extra years can help increase the pension payout you’ll ultimately get.

Kurt is contributing to the Thrift Savings Plan, a retirement-savings account for federal employees, and getting a matching contribution from his employer. A second act can be a good time to plump up your savings for an eventual full retirement. If you’re 50 or older, you can take advantage of catch-up contributions to 401(k)s and IRAs—in 2022, that’s an extra $6,500 (on top of the standard $20,500 limit) for 401(k)s and an additional $1,000 for IRAs (which have a standard cap of $6,000 this year). And the longer you can put off withdrawing from your retirement accounts, the more time the funds can grow tax-deferred.

RMDs and other withdrawals. By April 1 of the year after you turn 72, you generally must start taking required minimum distributions from tax-deferred retirement accounts, including traditional IRAs and 401(k)s. If you’re working at age 72, however, you can delay RMDs from a 401(k) with your current employer to April 1 following the year you retire (but you must take RMDs from 401(k)s you have with former employers on the standard schedule). An exception: You can’t postpone 401(k) RMDs if you have an ownership stake of more than 5% in the company.

If this rule applies to you and you don’t expect to need income from your other retirement accounts when you reach 72, one strategy is to roll the other accounts into the 401(k) of the employer you’re with currently, if it allows such transfers. Whether that makes sense for you depends on the specifics of your plans and preferences. If the investment options in your IRA are better than those of your 401(k), you may want to leave funds in the IRA and take RMDs at 72.

Keep in mind that if you’re working when you take RMDs, income from your job may boost you into a higher tax bracket, possibly increasing the tax you pay overall. “Often, it’s a good idea for people to try to maximize income before taking Social Security and RMDs to smooth out the tax liability,” says Ariadne Horstman, a CFP in Palo Alto, Calif.

Separately, some 401(k)s come with another special rule that can benefit those who retire early and later switch to another job. Typically, you must be at least 59½ to avoid a 10% penalty on withdrawals. But if you leave your employer for any reason and your age is 55 or older (or 50 or older for public safety workers, such as police officers and firefighters), you can take penalty-free distributions from the 401(k) of the employer you just left if the company allows it. Income from such withdrawals may help you get by if you need to cover expenses between jobs.

And keep in mind that withdrawals of contributions to Roth IRAs are free of taxes and penalties anytime (in most cases, withdrawals of investment earnings are subject to tax and a 10% penalty if you’re younger than 59½). If you undergo a period in which your earnings are especially low—say, the time between leaving your first career and switching to a retirement job—that may be a good opportunity to convert any traditional IRAs and 401(k)s that you have to a Roth IRA. You may pay less tax on the converted amount than you would while working full-time with a higher income. Your money grows tax-free once it’s in a Roth, and you won’t have to take RMDs.

Health Insurance

The question of how you’ll get health insurance coverage hinges on whether you are at least 65 years old—when you qualify for Medicare—and whether you’re eligible for your employer’s health benefits. Many employers do not offer health insurance to part-time workers, but some prominent companies, including Costco and Starbucks, extend it to part-time employees who work a minimum number of hours.

You may be able to negotiate health or other benefits with your employer, even if its formal policies don’t include provisions for workers who scale back on hours. You may also be able to negotiate a 401(k) match as a part-time worker. “I don’t find that many employers are dangling these perks publicly and or even privately to their employees, but if you ask about it, you may be pleasantly surprised to get some of the things you want,” says Richard Eisenberg, who recently retired from full-time work and now writes “The View from Unretirement” column for MarketWatch, among other retirement gigs.

If you are ineligible for Medicare or employer insurance, alternatives include getting on your spouse’s employer plan, if he or she is working; using COBRA, a law that allows you to stay on an employer plan for up to 18 months after leaving your job; or getting a plan through the government’s health insurance marketplace at HealthCare.gov. If your modified adjusted income (which includes earned income, Social Security benefits, and investment, retirement-account and pension income) falls below certain levels, you’ll qualify for a government subsidy that will lower the premium. Typically, to qualify for a subsidy, your income can’t exceed 400% of the federal poverty level. For example, with a 2022 health plan, that threshold is $51,520 for a single person, or $69,680 for two people in a household in most states. A temporary provision of a COVID-19 relief law allows eligibility for the subsidy at higher income levels in 2022, capping premiums at no more than 8.5% of household income, and it increases subsidies for those with incomes at 400% or less of the poverty level. Unless Congress acts, however, the enhanced subsidies will expire at the end of this year.

Medicare enrollment. If you have access to an eligible employer health plan, whether through your own employment or that of a spouse, you can delay Medicare enrollment when you reach age 65 without penalty as long as you’re covered by that plan. But Medicare is likely a no-brainer if you’re paying hefty premiums and other out-of-pocket costs with your current plan.

If you’re dropping your other health insurance, make sure you sign up for Medicare within your initial enrollment period, which starts three months before you turn 65 and ends three months after the month you turn 65. If you miss this window, you may have to pay a late-enrollment penalty for as long as you have Part B once you sign up. Once you stop working or lose employer coverage (whichever comes first), you have eight months to sign up for Part B without penalty.