Retirees With Side Jobs: 3 Ways the Extra Income Affects Your Finances

Retirees and senior citizens are facing a difficult moment.

The purchasing power of the dollar has been reduced by inflation, thereby increasing living costs. In addition, retirement savings have been severely dented by the disappointing stock market this year. 

According to research carried out by Boston College’s Center for Retirement Research, the value of 401(k)s and individual retirement accounts in the United States has shrunk by $3.3 trillion so far this year.

This predicament has pushed many retirees and seniors to take up side jobs to augment their source of income and pension payments.

51% of Americans aged 62 and older have a side job that pays $1,000 to $5,000 per month, and another 16% have a side hustle that pays between $5,100 and $20,000 per month – that’s according to a poll conducted by Alignable. 

But while an additional job can augment the primary source of income, many seniors and retirees may unknowingly walk into a financial pitfall, like paying more in taxes or reducing one’s benefits.

If you are among the retirees thinking about picking up an extra shift to supplement your income or retirement funds, it’s worth considering how the extra income could affect other parts of your financial life.

3 Ways Retiree’s Side Jobs Can Affect Their Finances

Taxes

The first thing you’re likely to face if you recently began working for yourself is tax consequences.

Taxes on wages must be withheld for Social Security and Medicare and reported to the Internal Revenue Service. You can be in for a nasty surprise come tax time even if you work for someone else and have a job where taxes aren’t deducted.

It’s wise to begin by estimating your quarterly tax payments. The IRS could levy fines if advance payments are not made.

Tax professionals recommend that as a general rule, 20% to 35% of cash flow should be set aside in a separate account to assist pay for taxes and other business expenses.

In order to benefit from business deductions, it’s crucial to maintain an account of all expenses. You can deduct health insurance premiums, including age-based premiums for long-term care coverage, in addition to the home office and business expense deductions if you are a self-employed individual.

Medicare

In addition to extra income from a job potentially pushing you into a higher tax bracket, it also could trigger additional costs for Medicare.

Medicare Part B premium adjustments

Medicare Part D premium adjustments

In essence, Medicare Part B (outpatient coverage) and Part D premiums are surcharged for individuals with greater incomes (prescription drug coverage). The additional fees begin when an individual’s income exceeds $88,000 and $176,000 for married couples filing joint returns.

Your income from the two previous tax years is used to calculate the cost of your monthly premium.

Your adjusted gross income from this year will be used to calculate your Medicare premiums in 2024 if you are currently enrolled in Medicare or will be in two years. Additionally, if your annual income exceeds a certain threshold, your premiums may rise by several hundred dollars.

Social Security

Your payments may be reduced if you begin receiving Social Security benefits before the government-defined full retirement age and continue to work or go back to work.

Although taking Social Security as soon as they are eligible, usually at age 62 or shortly thereafter, may result in a larger monthly check, delaying it will result in a higher monthly payment.

Anyone receiving Social Security benefits who is not yet totally retired should carefully consider whether going back to work in light of the potential reduction in their payments.

There is a maximum amount you can make from working without your benefits being impacted, even if you do start receiving those monthly checks earlier than expected. That cap is $19,560 for 2022. For every additional $2 you make over that amount, your benefits will be decreased by $1.

Let’s say that you file for Social Security benefits at age 62 in January 2022 and your payment will be $600 per month ($7,200 for the year).

During the year, you work and earn $23,920 ($4,360 above the $19,560 limit) $2,180 of your Social Security benefits would be withheld. 

The money then returns to you as a larger monthly check until you reach full retirement age, which is often around age 66 or 67 depending on your birth year. (And keep in mind that up to 85% of your Social Security payout may be subject to federal income tax, depending on your overall income.)

At that point, you are also free to work as much as you like and still receive Social Security payments.

Additionally, if you are one of those early retirees who is still employed when you reach full retirement age in 2022, your benefits will be reduced by $1 for every $3 you make beyond $51,960.

Remember your Required Minimum Distributions (RMDs)

The statutory minimum payouts are now due at age 72, up from age 71½, as a result of amendments that went into effect last year.

Working when you reach the RMD age may make it simpler for you to forget about those necessary withdrawals, according to experts.

RMDs often do not apply to that specific account until you retire if you are employed and making contributions to your employer’s retirement plan.

Your typical individual retirement accounts, as well as any 401(k) plans held by former employers, would still require you to take such payouts. You risk a potential 50% tax penalty if you don’t. RMDs are not required for Roth IRAs while the original owner is still living.

Retirees With Side Jobs: Final Words

Rising living costs have put pressure on the finances of retirees and those close to retirement. Not only has the value of the dollar been reduced, but retirement nests have been affected as well. 

Many Americans are not only postponing retirement plans but are also taking up jobs to get by rising living costs. However, the extra income they earn also exposes them to other financial risks such as taxation, reduction in social security, and Medicare costs. 

However, earning something extra, no matter how little is better than trying to sidestep the extra risks from earning more. The key is planning your finances to be able to cover your present and future costs.

Photo by Greta Hoffman