Americans are 'unretiring.' It's not by choice

Retirement might conjure up visions of kicking up your feet and enjoying your golden years after a long career. But a growing number of Americans are finding out that life after work is more costly than they had pictured.

In a new AARP survey, 7% of retirees age 50 or older said they’ve “unretired” and reentered the workforce in the past six months. The main driver? Money. Nearly half (48%) of those surveyed said they need the extra income, while others cited concerns about rising costs and financial uncertainty. Only 14% of older Americans said they were coming back to work because they want to stay active.

Separate research from Empower shows that less than half (45%) of Americans say they’re financially prepared for retirement, while 78% are worried about how inflation will impact their retirement savings. When you factor rising costs — average monthly car payments now exceed $1,000, average homeowners insurance premiums have jumped 40% over six years, and ever-higher household debt levels — and working becomes a financial necessity.

“Basic expenses are the number one reason older adults continue to work or job-hunt,” Carly Roszkowski, vice president of financial resilience programming at AARP, said in a statement. “With the cost of living still high and many people worried that they don’t have enough saved for retirement, the trend of older adults working longer will likely continue.”   

If you want to retire early but are concerned about rising costs, working longer (rather than unretiring) may be a better strategy, experts say. But you have to weigh a lot of factors into your retirement timeline: healthcare, taxes, income, expenses and projected longevity based on your own health and your family history.

"Housing, utilities, healthcare, all that stuff just goes up," said Bryan Kuderna, a certified financial planner and founder of Kuderna Financial Team in Shrewsbury, New Jersey. "Pre-retirees or semi-retirees need to build a healthy buffer above what their projected budget is,” he said, because a lot of things can happen to derail your outlook.

Stephen Kates, a certified financial planner and financial analyst with Bankrate, said that when someone who worked with a financial planner has to return to work out of financial need, "something has gone wrong." Either the planning wasn't done appropriately, the market crashed beyond what was anticipated or an unexpected shock — like a serious illness — upended the plan.

How healthcare figures into unretirement

One of the most overlooked issues early retirees face is healthcare coverage. Medicare doesn’t kick in until age 65, leaving those who retire before then in a tough position. 

Shelby Rothman, a certified financial planner and founder of EnJoy Financial in Glendale, California, shared a recent example. One of her clients who wanted to retire at 59 discovered private health insurance would cost $1,300 per month for a couple versus $500 through Covered California if their income remained low.

"That's a lot," she said, noting that returning to work could push them back into the higher health insurance premium bracket.

This dilemma might involve difficult tradeoffs for Americans who want to retire before Medicare kicks in. Do you work longer than you'd like to maintain employer-sponsored coverage? Or do you retire early and hope you stay healthy enough to avoid catastrophic medical bills while still affording health premiums and out-of-pocket routine care?

Tax traps and required minimum distributions (RMDs)

Unretiring brings its own set of tax complications, particularly for those who’ve already started taking Social Security or near the age they have to take required minimum distributions (RMDs).

At age 73, IRS rules state that retirees must begin taking RMDs from traditional IRAs. However, Rothman explained that returning to work while taking Social Security and mandatory IRA distributions “could put all of their income in a higher tax bracket as they progress through our tax system, and end up making a minimal difference if you pin the numbers out,” she said.

Some workarounds — rolling IRAs into an active 401(k) to suspend RMDs, for instance — can help, but they require planning and working with a financial planner, Rothman said.

Earning additional income can also impact Medicare premiums, which are means-tested. “It can cost you hundreds more a month,” Rothman said. Returning to the workforce to earn $25 an hour may not be worth it once all the tax implications are factored in, she added.

The job market isn’t what it used to be

Browse LinkedIn long enough and you’ll read story after story of mass layoffs and prolonged job searches. Even if you need to return to work out of financial necessity, the current job market is an unforgiving one with a lot of stiff competition.

"If you retired from a $200,000-a-year job, you're probably not eligible for a $200,000-a-year job three or four years later," she said. "You have to emotionally prepare for the kind of job that's going to be hiring you."

Then there’s age discrimination; it’s rampant and it’s real, Rothman said.

Her clients who successfully unretire often gravitate toward roles like museum docents, librarians or positions at national parks — jobs that provide meaning and social engagement rather than high salaries.

Gig work and self-employment (think freelance writing, coaching or consulting) can offer tax advantages for unretirees. It can also command decent pay and provide the social and mental stimulation older workers want without the stress and hours of a traditional office job.

"I love those kinds of gigs, because if they do their accounting right, they can take their income tax down to very, very minimal," Rothman said. "When you're working part time as a retiree, you're probably bringing in $20,000, $30,000, $40,000, $50,000 in just gig work, and it's easy to find deductions to get rid of most of that income."

This approach won't raise Medicare premiums or affect RMDs the way W-2 income might, making it a more tax-friendly path for supplemental retirement income, Rothman noted.

Plan ahead to avoid whiplash of unretirement

The experts agree that the best strategy for your later years is to avoid needing to unretire in the first place. This means you might want to work for longer.

Kuderna said that you want to build the highest possible baseline income in retirement by deferring Social Security as long as possible — ideally to 70 for the higher-earning spouse. Meanwhile, consider using annuities or pension income to bridge the gap between early retirement and when Social Security kicks in.

Kuderna also recommends using Roth conversions during lower-income gap years, typically around ages 62 to 63, to create a “tax arbitrage,” which helps you pick and choose which accounts to draw from throughout retirement to manage your liability.

Additionally, keep a liquid cash bucket in a high-yield savings account, for instance, for unexpected expenses when you’re 60 to 65 before you can go on Medicare, he added. No matter what, building in that budget buffer is critical, Kuderna stresses, because costs only move in one direction: up.

And, if you’re not ready to fully retire, consider a phased retirement, gradually reducing work intensive rather than stopping cold turkey, Kates recommends. This helps you supplement retirement savings and delay mandatory distributions without the stress and rigor of full-time work.