The sharp line between working and retired that defined prior generations is increasingly a fiction for the current wave of retirees. A growing fraction of Americans in their sixties and seventies continue working in some capacity after leaving their primary career, whether through phased retirement arrangements with their employer, consulting in their field of expertise, starting a second business, or pursuing paid work in an area of interest that was crowded out during the working years.
The financial impact of working in retirement is significant and often underappreciated. Even modest earned income, say $20,000 to $40,000 per year, can dramatically extend portfolio longevity by reducing the annual withdrawal requirement in the critical early years of retirement when sequence of returns risk is highest. The portfolio that doesn't need to be tapped as aggressively in the first decade has more capital available to compound and recover from early downturns.
But working in retirement also creates financial complications that pure retirement does not. Social Security benefits before full retirement age are subject to an earnings test. Medicare costs must be evaluated relative to employer-sponsored coverage options. The interaction between earned income and portfolio withdrawals in determining tax bracket placement requires careful management. Understanding these interactions is essential for retirees who plan to continue earning.
The most immediate financial benefit of working in retirement is the reduction in portfolio withdrawals. A retiree who needs $80,000 per year in total income but earns $30,000 from part-time work needs only $50,000 from the portfolio. At a $1,000,000 portfolio, the $80,000 need represents an 8% withdrawal rate, which is unsustainably high. The $50,000 draw represents a 5% rate, which while still elevated is far more survivable. The $30,000 of earned income turns a fragile plan into a manageable one.
The effect compounds over time. In the years when earned income supplements portfolio withdrawals, the portfolio is depleted more slowly or not at all. This preserves capital that continues to compound, and the larger capital base in later retirement generates more investment income and provides more buffer against healthcare costs and other late-retirement expenses.
The Social Security earnings test is the most misunderstood interaction between working and retirement benefits. Before reaching full retirement age, Social Security benefits are reduced if earned income exceeds the annual exempt amount, which was $22,320 in 2024. For every two dollars of earned income above the exempt amount, one dollar of Social Security benefit is withheld.
However, the withheld benefits are not lost. The SSA recalculates the benefit at full retirement age, crediting the months during which benefits were withheld. This means that the earnings test effectively delays benefit receipt rather than permanently reducing it. The break-even on this adjustment, the age at which the higher recalculated benefit fully compensates for the withheld months, is typically in the late sixties to early seventies.
For most retirees earning above the exempt amount before FRA, the optimal strategy is to delay Social Security until FRA or beyond, avoiding the earnings test entirely and collecting the benefit without reduction regardless of earned income level. After FRA, the earnings test no longer applies at any income level.
Phased retirement arrangements, where an employee transitions from full-time to part-time status with the same employer before fully retiring, are increasingly available and often provide access to employer benefits including health insurance at group rates. For retirees who haven't yet reached Medicare eligibility at 65, maintaining employer health coverage through a phased retirement arrangement can save thousands of dollars per year compared to individual market coverage.
The specifics of phased retirement arrangements vary by employer, and some plans have restrictions on distributions to active participants. A retiree considering a phased arrangement should understand whether in-service distributions or rollovers are available from the employer's retirement plan, and whether the phased arrangement affects benefit accrual in a defined benefit plan.
For retirees who are enrolled in Medicare or approaching Medicare eligibility, working part-time creates specific considerations. Earned income adds to MAGI, which affects IRMAA surcharges on Medicare premiums with a two-year lag. A retiree who earns significantly in their first retirement years may face higher Medicare premiums two years later based on that earned income.
For those under 65 who are working part-time and have access to employer health coverage, evaluating whether to maintain employer coverage or purchase ACA marketplace coverage is an important and potentially significant decision. Employer coverage through a working spouse or part-time employer is typically preferable to marketplace coverage when available at reasonable cost, because marketplace premiums for early retirees can be substantial.
Many retirees with professional expertise in law, medicine, engineering, finance, technology, or other fields find that consulting arrangements allow them to continue applying their skills on a flexible basis while generating meaningful income. Consulting income is typically self-employment income, which creates both tax planning opportunities, the ability to maximize SEP-IRA or Solo 401(k) contributions, and obligations, the self-employment tax on net consulting income.
For professional consultants generating $50,000 to $150,000 annually, continuing to maximize retirement plan contributions, perhaps through a SEP-IRA at 20-25% of net income, can shelter a significant portion of consulting income from immediate taxation while building additional retirement assets. The consulting years may also be an opportunity for accelerated Roth conversions if the consulting income doesn't push the retiree into a bracket that makes conversions inefficient.
Many retirees transition to paid or unpaid roles in nonprofit organizations, educational institutions, or civic bodies. Board positions, executive director roles, consulting arrangements with mission-driven organizations, and advisory roles can provide both meaningful engagement and modest compensation. These arrangements often allow significant flexibility in schedule while providing the social connection and sense of purpose that research shows is important for retirement wellbeing.
Some retirees pursue business ideas or creative interests that were crowded out during the working years. Whether it's a small retail business, a specialty service, an artistic practice, or a lifestyle business built around a passion, these pursuits generate income with varying predictability. The financial planning for entrepreneurial retirement income should account for the variability and build a plan that doesn't depend critically on the income in any given year.
A working retiree has earned income that affects tax bracket placement. Adding $40,000 of consulting income to $30,000 of Social Security and $20,000 of required minimum distributions places $90,000 of income into the tax calculation. The optimal withdrawal sequencing for a working retiree is different from a non-working retiree because the earned income already occupies lower bracket space that would otherwise be available for pre-tax account distributions or Roth conversions.
In many cases, working retirees with earned income should draw primarily from Roth accounts and taxable accounts for additional income needs, preserving the pre-tax account distribution capacity for the post-work years when bracket space is available again. This approach reduces current-year taxes while building pre-tax account capacity for systematic Roth conversions in the lower-income years that follow the working retirement period.
Retirees with self-employment income, whether from consulting, a business, or freelance work, have access to powerful tax-advantaged retirement plan options that reduce current taxable income. A SEP-IRA allows contributions of up to 20-25% of net self-employment income. A Solo 401(k) allows both employee and employer contributions, potentially sheltering more income for retirees who are 50 or older and can use catch-up contributions.
These contributions reduce adjusted gross income, which affects Social Security taxability, IRMAA exposure, and Medicare costs. For a high-income working retiree, maximizing self-employment plan contributions can produce a tax benefit that significantly exceeds the additional income tax on the consulting income itself.
Many working retirees who claim Social Security before FRA don't understand the earnings test or don't realize that withheld benefits are eventually recredited. They either claim late to avoid the test without running the numbers, or they claim early and are surprised when benefits are withheld. Understanding the mechanics allows for an informed decision about the optimal claiming age relative to the planned working retirement timeline.
Earned income in the working retirement years adds to MAGI, which can trigger IRMAA surcharges on Medicare premiums with a two-year lag. A retiree who earns significantly in years 66 and 67 may face IRMAA surcharges in years 68 and 69 that weren't anticipated. Modeling the IRMAA impact of planned working retirement income is part of the complete retirement financial picture.
Self-employed working retirees can deduct half of self-employment taxes paid, health insurance premiums if not eligible for employer coverage, and contributions to self-employment retirement plans. These deductions significantly reduce the net tax cost of self-employment income and should be captured consistently.
This quantifies the portfolio extension value of working retirement income in your specific plan.
This question structures the Social Security claiming decision around the planned working retirement income rather than treating them as independent decisions.
This surfaces the tax planning opportunity from self-employment income in the working retirement years.
This makes the IRMAA lookback concrete and forward-looking.
This asks for a specifically tailored withdrawal approach for the working retirement context rather than the standard retiree approach.
The retirement planning calculator at plan.johnkoyle.com was built to model exactly the dynamics discussed in this paper. The retirement calculator at plan.johnkoyle.com allows you to model working retirement income through the Additional Income input field. Enter the expected earned income amount and the years during which it will apply, and the calculator shows how the portfolio withdrawal rate changes during those years and how the Monte Carlo success rate responds. The difference between the success rate with and without the working retirement income shows you the concrete financial value of the earned income beyond its face amount, capturing the compounding benefit of reduced early portfolio draws.
John Koyle, AIF®, is the Co-Founder of Red Cedar Wealth Advisors, headquartered in Pocatello, Idaho. He holds the Accredited Investment Fiduciary (AIF®) designation, awarded by the Center for Fiduciary Studies (Fi360), which signifies completed coursework, a rigorous examination, and ongoing continuing education in fiduciary responsibility and prudent investment practices.
John serves individuals and families in or approaching retirement throughout eastern Idaho, the Pacific Northwest, and across the country via Zoom. Clients work directly with John, not a junior team. Red Cedar Wealth Advisors operates under Osaic Wealth, Inc. (Member FINRA/SIPC) and Osaic Advisory Services, LLC for investment advisory services.
Every client relationship is built on five integrated disciplines. The proportions shift with the client and the moment. The integration is constant. Most of the actual value sits in how these disciplines connect, not in any single one of them.
Retirement planning is a discipline that barely existed a generation ago. For most of modern history, people worked until they physically couldn't and then they died, usually fairly close together. The idea that an individual should spend decades saving, then spend decades drawing down those savings, with a plan that accounts for inflation, taxation, sequence risk, healthcare, longevity, and estate transfer, that's maybe forty years old.
Which means almost nobody your age grew up watching their parents do it properly. There's no cultural muscle memory. The advice industry backfilled that gap with rules of thumb that work sometimes and fail catastrophically the rest of the time. The 4% rule. 'You can take Social Security at 62.' 'Target-date funds will handle it.' These are not bad starting points. They are terrible ending points. Real planning is specific, personal, and built on principles that hold up across the full range of outcomes, not just the average one.
The tax code is a set of instructions Congress wrote to shape behavior. Aligning your financial life with those instructions is not aggressive planning. It is the planning. Roth conversion sequencing, capital gains compression on concentrated positions, charitable remainder trusts, Social Security timing, beneficiary coordination. None of these are obscure. They're all legitimate, all written into the code intentionally, and all under-used. Most CPAs handle compliance. The strategy work is a different discipline entirely.
Seventy percent of family wealth doesn't survive two generations. The reason isn't bad markets. The cause is failure to communicate, outdated documents, and no plan for preparing heirs. Beneficiary designations regularly override well-crafted wills. Trust structures created a decade ago no longer match current law or current family. The portfolio that built the wealth isn't the structure that transfers it. The work here is coordinating with your attorney to align documents, beneficiaries, gifting strategies, and trust funding with what you actually want to happen.
Every week, before any portfolio decision, John runs through four layers of market health: economic conditions, market internals, valuations, and sentiment. Each layer gets scored and those scores combine into a composite that maps directly to a portfolio posture, from aggressive on the positive end to defensive on the negative. The work is in the scoring. Once the scoring is done, the positioning follows. That removes one of the most dangerous things in investing: making it up as you go.
The protection gap quietly kills more plans than markets do. A significant net worth paired with inadequate liability coverage is a lawsuit away from a serious problem. Long-term care is more acute: a multi-year care event for one spouse can consume what was meant for the survivor. Most advisors relegate risk to a footnote because insurance conversations are uncomfortable. The math doesn't care. Coverage adequacy, umbrella sizing, long-term care planning, and life insurance structure sit alongside the portfolio in any complete plan.
These are the principles behind every plan John builds.
To begin a conversation, visit johnkoyle.com, use the retirement planning calculator at plan.johnkoyle.com, or reach John directly at john@redcedarwealth.com or (208) 915-8400. Initial consultations are complimentary and carry no obligation.