The financial implications of "Unretirement"

Key takeaways:

• Unretirement is a growing trend that could affect your clients. 
• When retirees re-enter the workforce, there are financial and emotional implications to consider. 
• Unretirement may impact taxes, retirement account eligibility, and estate planning. 

10/25/2024 — Retirement is often seen as the golden period of life, a chance to enjoy the fruits of a lifetime of labor. There’s a growing trend, however, known as "unretirement," where individuals return to work after retirement for various reasons. According to the Pew Research Center, the older workforce has nearly quadrupled in size since the mid-1980s.¹ And there are many reasons for this, beyond just the increase in the 65 and older population. 

Personal fulfillment or financial necessity?

So why are we seeing so many people re-entering the workforce after retiring? Some may seek work for personal fulfillment, such as staying mentally active or maintaining a sense of purpose. And some may face unexpected expenses, insufficient savings, or changes in the economic climate that affect retirement income, pushing them back to a job more as a necessity. Ultimately, the decision to re-enter the workforce is highly personal, influenced by a complex interplay of financial, emotional, and situational factors. Understanding these reasons allows you to offer tailored support, focusing on both the practical and emotional aspects of this transition, empowering clients to make informed choices that enhance their quality of life.

Financial implications of unretirement

While the benefits of unretirement may sound appealing to certain individuals, there are financial implications to be aware of as well. 

1. Unretirement may impact taxes.

Additional income could push retirees into a higher tax bracket, affecting take-home pay and potentially reducing the tax efficiency of other income streams. Financial professionals should work with clients to understand their new tax situation.

2. Unretirement might alter eligibility or benefits from retirement accounts.

For instance, returning to work could affect the required minimum distributions (RMDs) from retirement accounts, depending on age and employment status. Clients need to be aware of these rules to avoid penalties and optimize withdrawals.

3. Working past retirement age can influence estate plans.

Changes in income, savings, and overall financial health might necessitate updates to wills, trusts, and beneficiary designations. Financial professionals should help clients reassess their estate plans to ensure alignment with their current and future wishes.

Emotional implications of unretirement

For clients who are re-entering the workforce out of financial necessity, there may be complex emotions to work through. Not many people retire thinking they’ll eventually head back to work, so managing that expectation can be challenging when plans go astray.

For some, inadequate retirement savings or unforeseen financial burdens, such as unexpected medical expenses, family obligations, or even the death of a spouse may necessitate a return to the workforce. Knowing how heavy this kind of decision can weigh on clients (and the gravity of these types of circumstances) can help you advise them with patience and understanding. Regardless of a client’s particular reasoning, it’s likely a difficult decision for them to make. As a financial professional, you’ll want to support your clients through these feelings of stress and anxiety and reassure them that returning to work isn’t a failure, but a change of plans.

Retirement income and expenses

With new income streams, clients may need to reassess their budget and determine the best use of additional funds. This process involves identifying essential versus discretionary expenses and ensuring that financial resources are allocated efficiently. Additional income can supplement retirement savings, allowing clients to maintain or even elevate their lifestyle. It might also provide an opportunity to pay down debt or contribute to education funds for grandchildren, depending on your client’s goals. This new phase may also introduce new expenses, such as commuting costs, professional attire, or increased dining out.

Health Care Costs

Health care is a significant consideration for retirees, and unretirement can impact coverage and expenses in various ways. For those eligible for employer-sponsored health insurance, returning to work may provide access to more comprehensive or affordable coverage. This can be a substantial financial and emotional benefit, reducing out-of-pocket expenses and providing peace of mind.

Unretirement may also delay the need to enroll in Medicare, allowing clients to defer premiums and utilize employer benefits instead. It's important for financial professionals to help clients weigh the pros and cons of delaying Medicare enrollment and understand how it interacts with employer plans.

Returning to work could also mean adjusting how clients pay for prescriptions, specialist visits, or other medical needs. You can play a pivotal role in helping clients manage these costs and ensure they have adequate coverage.

Social Security and Medicare

Understanding how work after retirement affects Social Security and Medicare is critical for clients contemplating unretirement. Working can impact Social Security benefits, especially if clients were early retirees. You can help clients comprehend the earnings test and how additional income might temporarily reduce benefits.

Unretirement can also have implications for Medicare premiums. Higher income levels might result in increased premiums for Medicare Part B and Part D, known as Income-Related Monthly Adjustment Amounts (IRMAA). Guiding clients to plan for these potential increases can prevent surprises.

Social Security strategies might also need reevaluation. Returning to work can offer the chance to enhance benefits, particularly if new earnings exceed those from prior years that were used in the calculation of their social security benefit.

Planning for unretirement

Planning for unretirement requires a holistic approach that encompasses financial, emotional, and lifestyle considerations. You can facilitate open conversations with clients about their motivations and goals for returning to work, ensuring that their financial strategies align. Clients should be encouraged to revisit their retirement plans, incorporating new income, expenses, and timelines. You can also assist in developing flexible strategies that accommodate changes and allow clients to adapt as circumstances evolve.

Building a support network is vital for those returning to the workforce. You can help clients connect with resources, such as career coaches, financial educators, and community groups, to ensure a successful and fulfilling transition back into the workforce, providing support and encouragement during such a big change.

Guiding clients through this transition involves understanding the financial implications, providing strategic advice, and empowering them to achieve their goals. By addressing the key areas of retirement income, expenses, health care, Social Security, and planning, you can support clients in making informed decisions about returning to work after retirement. Encouraging a proactive approach and offering resources can ensure that unretirement is a rewarding and enriching chapter.