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When considering how to pay for retirement, we often think in terms of a total number we’ll need to reach. But it may be more useful to think about the different sources of income we’ll be able to tap.
If you’re like most people, you’ll be drawing from multiple buckets.
First there’s social security, a modest yet also considerable amount for which the vast majority of us will qualify. Next there’s savings, covering anything in a 401K, IRA or even a traditional savings account. This bucket is the focus of most of the discussion around retirement planning, and the contents of the savings bucket are highly variable from person to person. Third, for a fortunate but shrinking group, there are pensions. The fourth big main potential source of money to fund retirement is a catchall of “other” types of unearned income: this would include things like income from rental properties.
But, there’s more. There’s also a fifth possible bucket from which you might be able to draw, which is active income, earned not from an income property or investments, but from actual work.
Should you work in retirement? Before answering, it’s important to ask whether you’ll be able to work in retirement. If you have a physically demanding job, you might not be fit to work well into your sixties or beyond. And if you suffer a late-career layoff, you might not be able to find work. The term “early retirement” might carry connotations of pools and golf and leisure, but the reality is that a large portion of workers are forced into early retirement when they can no longer work or cannot find work. Given this reality, the real luxury is arguably the luxury to choose to work past a typical retirement age. Tip: Save early and if you are able to work in your later years, consider it a bonus.
But if you are about to work, should you? There’s a popular school of thought that says that, yes, you absolutely should work as long as you can. And there really is a lot to be said for working. Even if you’re only working part-time, the additional income you can earn is significant if you see it in terms of a whole new source of funds: Say you are generating $50,000 in annual income from social security and savings. Then, say you have the opportunity to work enough to net $25,000 a year. That may not sound like a lot in terms of total salary, but if you’re already a retiree bringing in $50,000 from outer sources, this would increase you actual income by 50%. That’s more than a drop in the bucket. Tip: Part-time work could be the best of both worlds, providing both income and leisure time.
Working can also bring many additional benefits from staving off boredom to keeping you intellectually challenged. But if work is not a financial necessity, it’s important to consider work in terms of your other dreams and aspirations, which may include travel, volunteering, family time, or many even forming a foundation or starting a new business (which may even yield income down the road). Retirement, after all, is the time to focus on your bucket list. If you’ve been working all your life, now’s the time to consider other options. Tip: Don’t sell yourself short. Dream big.
Finally, consider the financial costs and benefits of working in retirement. If you’ve retired early, are earning an income above a certain level can actually cut into your social security benefits. So if social security is your main source of income, you’ll really need to run some numbers to make sure there is a net benefit. Once you’ve reached full retirement age you can work as much as you want without cutting into your benefit, and you may even see some upside. But since you’ll be paying taxes on the income you earn, it could put you into a higher tax bracket. Tip: Everyone’s profile is different, so run the numbers.
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