Should You Work in Retirement?

So you've paid your dues for decades, and it's time to decide whether you're ready to retire. You're not only wondering whether you can afford to live off your savings, but you're wondering how leaving the workplace could affect your life in general. And you're certainly not alone. In fact, according to the 2014 Retirement Confidence Survey by the Employee Benefit Research Institute (EBRI), 65% of people consider working for pay after they've retired. However, a much lower number -- about 27% of those surveyed -- actually do.

The motivation for many to remain in the workforce is largely positive. Many cite a desire to stay involved, remain active, and work simply for enjoyment. The EBRI survey found that for many people, work is fulfilling and constitutes a big part of their life. 

Still, many seniors facing retirement are driven to remain working by one of their biggest fears: running out of money. Retirees seek additional income for a variety of reasons, whether they want to live it up, simply try to make ends meet, make sure their nest egg sees them through retirement, or maintain health insurance and other benefits. 

The ultimate decision comes down to the individual's financial needs. To help you make the right decision for you, here are some pros and cons of working during retirement.

Investments and Income
Pro: Putting in additional time in the workforce can help your nest egg continue to grow before you tap into it. Two "extra" years compounded at 6% annually can turn $1 million into a little more than $1.12 million and make a 4% savings withdrawal rise from $40,000 to almost $45,000 (assuming an annual withdrawal rate of 4%).

Con: If you have a traditional Individual Retirement Account (IRA), you must begin taking required minimum distributions at 70-1/2 years of age. These withdrawals count as income, so this could mean more of your Social Security benefits would be taxed. Having a Roth IRA may pose a different dilemma. Although Roth IRAs are not subject to required minimum distributions (RMDs) during the owner's lifetime, there are distribution requirements in the event of the account owner's death. The special circumstances surrounding your Roth IRA now obligate you to consider RMDs in your estate planning.

Social Security Benefits
Pro: If you work during retirement, you'll earn more over time, which will increase the amount of your Social Security benefits. Also, the longer you delay collecting Social Security beyond your full retirement age, the higher your benefits will be. Consider this example:

Worker Joe Jones is eligible for a monthly Social Security benefit of $1,960 at his full retirement age of 66. Let's compare the total amount of benefits he would receive over his lifetime at full retirement and delayed retirement (assuming he lives until age 90):

• Starting at age 66 (taking full benefits): $564,480
• Starting at age 70 (taking advantage of delayed-retirement credits): $620,928

The difference in this case is more than $56,000 in retirement income.

Con: If you do keep working and boost your retirement income above a certain amount, you may be subject to income taxes on your Social Security benefits. You'll end up paying federal income taxes if your combined income -- based on the sum of nontaxable interest, your adjusted gross income, and half your Social Security benefits -- exceeds $25,000 for an individual return or $32,000 for a joint return.

Career and Lifestyle
Pro: Aside from the financial advantages of staying in the game longer, you also may be eligible for valuable medical benefits provided by your employer. Those who continue working past the age of 65 have the option of Medicare, their company-sponsored health care plan (if offered), or a combination of both.

Con: Many retirees assume that Medicare will afford them the coverage they might need. Not so, financial experts say. According to EBRI, Medicare currently covers only 62% of the expenses associated with health care services. Seniors have to tap into their own personal savings to fill the gap.

There are numerous advantages to working in retirement, but it comes with some downsides as well. You may want to meet with a qualified financial professional to discuss the pros and cons of working longer. With proper guidance, you can create a winning game plan to make the most of any extra income you earn during your retirement years.