Upon retiring, many people are often invited to continue working part time in a consulting role. Whether to accept is one of the biggest decisions they face in early retirement. While there are a couple of drawbacks to consider, there are also several upsides, some of which are not obvious, that might make this proposition worth considering.
Let’s first point out the two main downsides:
1. Self-employment taxes
For some, the self-employment tax can come as a nasty surprise. As an employee, you pay a combined 7.65% Medicare and Social Security payroll tax on your first $127,200 of wages. When you are self-employed, however, you pay double that rate. In other words, you’ll pay 15.3% in payroll taxes, in addition to any applicable federal or state income taxes.
The one small silver lining is you can deduct half of your self-employment tax on your federal return. This appears as an above-the-line deduction, so it applies whether or not you itemize.
2. Loss of freedom
The whole idea of retirement is to do what you want, when you want. Consulting ostensibly undermines this objective. People worry that it will impede their flexibility or travel plans, or even worse, that the very stress they’re trying to escape will only continue.
After considering the downsides of self-employment taxes and a loss of freedom, many people reflexively rule out any sort of continued employment whatsoever in retirement. Before you close that door, however, it must be emphasized that not all retirements are successful. Some people find their standard of living reduced, some never find the enjoyment they anticipated, and some are even forced back into the workforce.
Those who wish to minimize the likelihood of any of these outcomes would be wise to carefully consider all their options. There are several benefits to part-time work that might not only outweigh the downsides, but also significantly increase the odds of a successful and meaningful retirement:
1. Extra income
The single largest risk most retirees face is a market meltdown during the first few years of retirement, creating a hole from which they can’t recover. The income earned from consulting greatly reduces the stress on your portfolio by reducing your withdrawal rate during these critical years.
2. Tax deductions
When you are self-employed, several everyday expenses become tax-deductible. For example, if you don’t have access to a group plan, your premiums for long-term care and health insurance (including all parts of Medicare) for you and your spouse become an above-the-line deduction.
In addition, several other necessities can become deductible, assuming they are bona fide business expenses. Examples include computers, phones, certain travel, etc. Even with the self-employment tax, many consultants find their tax situation to be improved in early retirement.
3. Social Security benefits
Continuing to work may increase your Social Security benefits, providing higher income for the rest of your life. Your benefits are based upon the average of your highest 35 years of inflation-adjusted earnings, so if you keep working, you could potentially replace some of your lower earlier years. In addition, the income from consulting makes it more palatable to defer Social Security benefits, which is a powerful way to reduce longevity risk. Keep in mind that this unique income source is guaranteed, has built-in tax advantages, and is adjusted annually for inflation. For someone born between 1943 – 1954, delaying the start of taking Social Security from age 62 to 70 increases the starting benefit by a whopping 76%.
4. More interesting work
Many find the annoyances of work to be largely removed. Gone are the days of employee reviews, administrative work, mandatory HR trainings, etc. Most consultants also work primarily from home, eliminating the drain of commuting. With the nuisances stripped away, you’re left to focus on the most interesting part of the job itself.
5. Benefits of work
Do you remember how, at one point, you couldn’t wait to be done being a student, only to find out after a couple years of working how good you really had it?
Work is no different. People generally don’t realize the immense benefits it provides until they’ve been out of the workforce for a couple years. For many professionals, their career is their primary source of purpose, community, personal growth, identity, etc. Retirement therefore creates a tremendous void that does not become apparent until the novelty of excess freedom wears off, particularly for those who do not proactively fill their days with equally stimulating alternatives.
6. Easier transition
Sometimes the transition into full retirement can be too abrupt. Many people discover that entire weeks or months with an empty calendar unfortunately tends to cause more problems than it solves. Downshifting instead to part-time work can provide just the right amount of relief for some, increasing their free time by an enjoyable and manageable amount.
Although there are strong exceptions, in our practice we’ve observed a noticeable difference in the health and demeanor of those who work part-time in retirement versus those who don’t. Quite simply, those who do tend to be happier and healthier.
Why is this? As one client put it, “Freedom is like chocolate cake. You love it, but too much can be bad for you.” In our surveys, those who earn income in some capacity report much higher rates of:
- Feeling a sense of purpose
- Mental acuity
- Positive mental health
- Energy levels
- Volunteering or engaging in other interests
- Overall good health
The trick, of course, is figuring out how to replace the benefits of work without re-inviting the stress. If you’re considering part-time work, establishing correct boundaries from Day One is critical. For example, you might limit yourself to a certain number of hours per week, a certain number of weeks per year, and delineate which tasks you’re unwilling to do. You might also consider taking extended time off before starting, giving you the opportunity to dive full-bore into your bucket list. Negotiating everything on your terms is easier said than done, but remember that it’s in everyone’s best interests for you to be satisfied with the new arrangement.
For both financial and non-financial reasons, continuing to work in early retirement can be very healthy. Consulting is one option, but not the only one. Starting your own business, earning a new degree, volunteering, etc. can all accomplish the same thing.
If you simply can’t imagine going back or are looking for additional opportunities outside your field, consider a resource like Encore.org, which has helped many of our clients find new purpose and meaning in their retirement.
Yoder Wealth Management does not provide tax advice.
Michael Yoder, CFP®, CRPS®, writes about issues affecting retirees and those transitioning into retirement. He is Principal at Yoder Wealth Management (www.yoderwm.com), a Registered Investment Advisor. 2033 N. Main St., Suite 1060, Walnut Creek, CA 94596. 925-691-5600.
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