Working in Retirement: Social Security and Medicare

Are you retired but considering going back to work?

Whether you're in it for the extra income or merely getting paid for something you enjoy doing anyway, it's important to understand how bringing home a paycheck in retirement could affect your Social Security benefits and medical insurance coverage. 

Here are a few things to consider before punching that timecard.

If you are under your full retirement age (FRA)—between 66 and 67 for people born in 1943 or later—for the entire year, working could mean temporarily giving up $1 in benefits for every $2 you earn above the annual limit ($22,320 in 2024). In the year you reach FRA, $1 in benefits is deducted for every $3 you earn, but the limit is much higher ($59,520 in 2024). Starting with the month you reach your FRA, there is no limit on how much you can earn and still receive benefits. (As a reminder, you receive your largest monthly benefit by delaying retirement until age 70 but not beyond, so it never makes sense to wait past that age.)

That said, any reductions that do occur are temporary. The Social Security Administration (SSA) will eventually recalculate your benefit and give you credit for months when you received a reduced benefit, thereby boosting your future benefit. (For more information, refer to "How we deduct earnings from benefits.") 

Here are some examples of how that might look:

Remember, as long as you're working, you (and your employer, if applicable) will need to pay the Social Security portion of the Federal Insurance Contributions Act (FICA) tax. 

Also, keep in mind that Social Security benefits are based on your highest 35 years of income, so returning to work in retirement could actually boost your Social Security benefits by replacing or filling in for years when you had little or no earnings.

You can estimate how much your annual benefits will be reduced by using the SSA's Retirement Earnings Test Calculator. For more information, see the SSA publication "How Work Affects Your Benefits." 

Your modified adjusted gross income (MAGI) matters here. Once your MAGI increases above a certain threshold (from earning a paycheck, for instance, or certain other income sources), a greater percentage of your benefits is subject to income tax, to a maximum of 85%.

For details, see IRS Publication 915, "Social Security and Equivalent Railroad Retirement Benefits," or consult with a tax advisor.

Imagine you had to start Social Security benefits before reaching FRA because you needed the income, despite knowing that your benefits would be permanently reduced. Then, you got a new job, and you realized you no longer needed your benefits.

In this case, you could actually pay back what you've already received and then restart benefits later with a higher payout.

Here's an example: Say you chose to receive benefits at 62 and nine months later decided you wanted to return to work. You could stop receiving Social Security by withdrawing your application for benefits, pay back the benefits received, and return to work. Then, you could wait until age 70 to restart your benefits at a higher level.

Keep in mind the amount you pay back will be the gross value of the benefits received, which includes any withholdings for Medicare premiums, income tax, or both. In addition, the option to pay back Social Security is limited to the first 11 months' worth of benefits, and the SSA allows repayment only in the first year after you start to receive benefits.

What about when you've reached FRA? You can voluntarily stop benefits at any point before age 70 to receive delayed retirement credits (spousal benefits will be stopped as well). Benefits then automatically restart at age 70 at a higher amount, unless you choose an earlier date.

Take note that when you withdraw your application or stop your benefits after full retirement age, you must specify whether you would also like to suspend your Medicare coverage, if you have it.

Eligibility for employer-offered group health insurance is one of the primary reasons many people under age 65 stay in, or return to, the work force. If you're 65 or older and already covered by Medicare, check with your employer's human resources department about how their insurance coverage would work with your Medicare coverage. In short, Medicare could help pick up the tab for expenses not covered by your group plan, but the rules vary depending on how many employees your employer has. For more information, read "Medicare and Other Health Benefits: Your Guide to Who Pays First."

If you have private health insurance, compare your benefits and coverage with plans offered by your new employer. Although group plans tend to be less expensive than individual policies, you could be better off keeping your individual health plan rather than canceling it and hoping you can get your old coverage and rates back later.

Both Medicare and additional Medicare insurance coverage have specific enrollment periods, and if you miss them, you could potentially be hit with late-enrollment penalties. However, you may be able to enroll after age 65 without penalties if, for a period after you reach age 65, you have eligible employer health insurance coverage that will allow you to sign up during a special enrollment period. Pay close attention to Medicare enrollment periods if you have retiree health insurance from a former employer or are under COBRA. These types of coverage typically do not allow you to defer enrollment past age 65 without penalties and may leave gaps in your coverage.

Also note that once you are enrolled in Medicare, you're not permitted to make contributions to a Health Savings Account (HSA). If you enroll in Medicare after reaching age 65, Medicare will typically backdate your enrollment by six months (but no earlier than age 65). To avoid an IRS penalty, make sure you stop contributions to the HSA in time. 

Returning to work after retirement is ultimately a personal decision. If it supports your goals and financial needs, then go for it. With a little planning, your new job can complement your Social Security and health insurance arrangements. As always, contact your financial advisor or other trusted financial professional if you have questions.