For 25% of retirees going back to work, there's a tax pitfall to avoid

Has retirement lost its luster? Nearly a quarter of retirees seem to think so, according to a new survey conducted by Indeed Flex, an online marketplace for flexible and temporary work.

The survey, which queried 1,000 boomer-age Americans, found that 23% of retirees were considering a return to work. Some respondents said they were considering temp work to make extra money, while others said they wanted to return to work for the socialization it offers.

Across all respondents in the survey, just over half said they would prefer working 10 to 20 hours a week. Roughly a quarter said they would like to work 20 plus hours a week, while 14% said they would only want to work up to 10 hours a week.

Financial advisors say the survey's results reflect experiences with their clients who have moved back to the workforce.

For some retirees, "un-retirement" may be driven more out of necessity than desire. A vast majority of retirees say that Social Security has failed to keep up with inflation, pushing some back to work to make up for the gap between their income and expenses. But money shortages aren't the only factor.

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Even some high net worth clients are considering a return to work, advisors say. 

"It's funny because a lot of people who do have very intense jobs, a lot of them don't necessarily know what they're going to do in retirement," said Lauren Lindsay, a financial advisor at Beacon Financial Planning in Hyannis, Massachusetts. "[If] their job was their whole life, sometimes leaving it can be very, very hard, because it's the lack of routine, the lack of the people, the lack of the purpose, and so going back on a little easier schedule can be quite attractive to people."

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Lindsay's clients, many of whom worked in engineering and biotechnology, have returned to work in a consulting capacity, she said. Making extra income never hurts a retirement plan, advisors say, but there remain some important considerations for retirees before making the move.

For relatively young retirees who started taking Social Security at 62, making a return to work before full retirement age could lead to a cut in their benefits, according to Ryan Perry, a financial advisor at Falcon Wealth Planning in Ontario, California.

In 2025, retirees under the full retirement age who take Social Security payments can earn up to $23,400 before they see their benefits reduced, according to the Social Security Administration. Beyond that limit, the SSA will deduct $1 from their benefit payments for every $2 they earn above the annual limit.

Even for retirees above the full retirement age, a return to work could also have tax implications for their Social Security benefits, Perry said. 

Currently, a single retiree's Social Security benefits will not be taxed if they report $25,000 or less in "combined income" — defined as adjusted gross income, nontaxable interest and half of their Social Security benefits — in a given year.

For retirees reporting between $25,000 and $34,000 in combined income, up to 50% of their Social Security benefits can be taxed. That figure jumps to 85% for retirees reporting more than $34,000 in combined income if they're single, or $44,000 if they're married and filing jointly.

Retirees returning to work are still going to earn more money overall, Perry said; but, it's important that they know about the impact it could have on their Social Security benefits.

READ MORE: Why baby boomers are choosing to 'unretire' and head back to work

Concerns about taxes on Social Security could soon be a moot point. The Trump administration has doubled down on its plan to eliminate Social Security taxes, and last month a bill was introduced to the House of Representatives that would remove taxes on Social Security benefits. But for now, retirees considering a return to work could see a greater portion of their benefits taxed if their work pushes their combined income past the federal limits.

Working for more than the money

Despite some of the potential drawbacks, returning to work will almost always be a net benefit for a retirement plan, Perry said. "A financial planner is never going to say, 'Hey, don't go back to work,' because it just makes the plan look better, because there's more income coming in," he said.

For retirees themselves, returning to work is often about factors outside of their finances.

"We all need a sense of purpose in the morning, to kind of swing our legs off the bed," said Mike Lynch, managing director of applied insights at Hartford Funds in Wayne, Pennsylvania. "So what are you going to replace work with? What's that sense of purpose? What's that meaning? And I think for many folks, they really struggle with that."

Lindsay said that her father, an anesthesiologist who retired after growing tired of working nights and weekends, returned to the field after just three months of retirement.

Like many of her clients, Lindsay's father returned to work on a part-time, fixed-schedule basis. For clients who find the hard transition from a full-time career to retirement difficult, advisors say that reducing hours and adjusting their schedules can help make the move to retirement easier.

"Some people are just not very good at retirement," Lindsay said. "[They] have their identity tied to their career and who they are is what they do."