Returning to work but close to retirement? Adjust your plan

[April 23, 2022]  By Mark Miller

(Reuters) - The Great Retirement is morphing into the Great Return, with the U.S. employment report for March, released earlier this month, showing a jump back into the labor force among older workers. That reflects the plentiful number of available jobs - and reduced concerns about the health risks associated with COVID-19.

The pandemic forced millions of older workers into early retirement, causing many to stop saving and claim Social Security earlier than planned. This robbed them of the opportunity to boost their monthly benefits down the road through a delayed claim.

Working longer is a great way to bolster income in retirement. But if you count yourself among the “back to work” crowd, your retirement plan may need an adjustment - especially enrollment in Social Security and Medicare.

SOCIAL SECURITY DO-OVERS

If you claimed Social Security but have gone back to work, you have a couple do-over opportunities on delayed claiming.

You can withdraw your application within 12 months of starting benefits - but that strategy might not be attractive, because you would need to pay back all benefits that have been paid up to that point.

The second option is to suspend retirement benefits at Full Retirement Age (FRA) or later to earn delayed retirement credits. But Social Security also permits you to suspend benefits when you reach your FRA - 66 and a few months for most people now approaching retirement. You can then resume accumulation of delayed credits up to age 70. You can do this only once, but delay could boost your benefits substantially down the road.

Your monthly Social Security benefit is determined by a formula tied to your FRA. This is the point at which you can claim 100% of your earned benefit. You can claim a retirement benefit as early as age 62, but if you file before your full retirement age, your benefit will be reduced by as much as 6.7% annually. But filing after your FRA yields an 8% increase for every 12 months of delay, up to age 70.
 

The math is a bit different with a suspension of benefits at FRA, because the delayed credits are calculated from your already-reduced benefits. But the strategy can still be very valuable.

“This can add up to tens of thousands of additional dollars per year,” said William Meyer, co-founder of Social Security Solutions, which offers software aimed at helping retirees make optimal claiming decisions. “It also creates a longevity hedge if you live longer than you expect.”

Another heads-up on Social Security: if you receive income from work and Social Security before your FRA, your benefit is reduced by the Retirement Earnings Test, which withholds one of every two dollars in benefits over a certain amount of wage income. This year, the test is applied to income over $19,560. Those benefits are not lost. When you reach full retirement age, Social Security recalculates your monthly benefit to credit you with any withheld benefits.

The Social Security Administration has posted a calculator you can use to determine any effect of the test on your benefits.

MEDICARE: WATCH THE PENALTIES

If you return to work after claiming Medicare at age 65, you might have the option of switching back to employer coverage - but do so with great care.

Medicare requires that you sign up during a seven-month Initial Enrollment Period that includes the three months before, the month of, and the three months following your 65th birthday. Missing that window triggers late-enrollment penalties levied in the form of higher premiums that continue for life.

There really is only one important exception to these rules: you can delay enrollment if you are still working beyond age 65 and have insurance through your employer, or if you receive insurance through your spouse’s employer.
 

The late-enrollment penalty for Part B is equal to 10% of the standard Part B premium for each 12 months of delay. There are also late-enrollment penalties for the Part D prescription drug program, although they are less onerous.

Disenrolling in Medicare could expose you to late penalties later on when you enroll again, so it is very important to understand whether insurance from your new employer qualifies you for an exemption. You also run the risk of delays in coverage when you return to Medicare, depending on the timing of your enrollment.

If your insurance comes from active employment, you can delay without risking penalties. But to ensure that you have adequate coverage you should not disenroll if you work for an organization with 20 or fewer employees. In those cases, Medicare becomes the primary payor at 65, and you must be enrolled at that age to avoid large out-of-pocket expenses.

Enrollment rules aside, also compare an employer insurance option with Medicare to determine which is better for you - personally and financially. “It’s a very personal choice,” said Casey Schwarz, senior counsel at the Medicare Rights Center. “But I’d start by comparing how much you’re paying in Medicare premiums and out-of-pocket costs.”

If you are receiving wage income and perhaps Social Security, it is easy to trigger Medicare Income-Related Monthly Adjustment Amounts (IRMAA). These are surcharges tacked on to Medicare Part B and Part D premiums for enrollees with incomes over certain levels that can increase Medicare costs substantially.

There are five surcharge brackets, defined by your modified adjusted gross income.

This year, the first bracket applies to individual tax filers with income above $91,000. Your monthly Part B premium would be $238.10 instead of $170.10. The Part D surcharge is smaller - $12.40 this year for enrollees falling into the first bracket.
 

SAVING: PLAY CATCH-UP

Going back to work sets the stage for resumed late-in-the-game retirement savings. This year, you can contribute up to $27,000 to a 401(k) if you are over age 50; your IRA contribution limit is $7,000.

The opinions expressed here are those of the author, a columnist for Reuters.

(Writing by Mark Miller; Editing by Matthew Lewis)

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