Working Past the Age of 65 Can Affect Your Social Security and Medicare Benefits

March 28, 2022

“Retirement” is just altering where or how you work for a rising number of Americans.

According to TD Ameritrade, more than half of Americans in their forties and fifties anticipate to continue working beyond retirement. This includes 86 percent of adults in their 50s, and a whopping 92 percent of those in their 40s anticipate to continue working after reducing their primary occupation.

Although we often believe that making more money is always the aim, a successful retirement job might entail greater taxes and increased medical insurance costs — as well as a possible reduction in your Social Security income. “People don’t think about how it affects their other income streams,” says Matt Nadeau, a wealth advisor with Piershale Financial Group in Chicago.

Withhold Your Social Security Benefits

Drawing Social Security before reaching full retirement age (67 for those born in or after 1960) decreases your monthly benefit, therefore common wisdom is that you should wait until you reach full retirement age if at all feasible.

If you plan to work and collect Social Security between the ages of 62 and full retirement age, keep in mind that your benefits will be reduced by $1 for every $2 earned beyond $17,640 and $1 for every $3 made above $46,920 during that time. When you reach full retirement age, these deductions stop.

Make a Provisional Income Calculation

The government determines how much tax you pay on your Social Security payments using a criterion known as provisional income. This is computed by combining your taxable and nontaxable salaries, dividends, and interest, pensions, and half of your yearly Social Security payments. Married retirees filing jointly with a total annual provisional income of less than $32,000 do not have to pay federal income taxes on their Social Security payments, but those earning between $32,000 and $44,000 do. Social Security benefits are taxed at a rate of 85 percent for anyone earning more than $44,000 per year. (Note that this does not imply an 85% tax rate; it just means that income taxes apply to 85 percent of the benefit.)

Consider converting to a Roth IRA

Remember that if you reach the age of 72, your provisional income will include RMDs from conventional IRA or 401(k) funds. (The RMD age was raised to 7012 by the SECURE Act, which was approved late last year.) If you do the arithmetic and discover that your RMD income will push you into higher tax and Medicare premium brackets before you age 72, financial gurus recommend putting part of your assets into a Roth IRA.

Prepare for the Unexpected

Finally, experts advise being realistic about your ability to work well into your senior years, both physically and mentally. If you expect to work into your 70s, don’t assume you’ll be able to take on more debt since a health crisis or other difficulty might disrupt your goals.

“The number one reason individuals assumed they’d be able to work after retirement but couldn’t was health – either their own or that of a spouse or loved one they needed to look after,” Russell explains.