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Illustration by Kiersten Essenpreis

For a growing number of Americans, “retirement” simply means changing where or how you work.

More than half of Americans age 40 and up expect to continue doing paid work after retirement, according to TD Ameritrade. This includes 86% of people in their 50s, while a remarkable 92% of people in their 40s expect to keep working after dialing back their main career.

Some people embrace working in retirement as a positive choice, since they enjoy the mental challenge or socialization a job provides. Others even undertake a later-life "encore career" and launch a new professional chapter entirely.

Of course, money is a big consideration as well. For some people, working in retirement is the only way to make ends meet. A new report from the Transamerica Center for Retirement Studies found that 84% of women who plan to work in retirement say their motivation is financial necessity. And if you have your heart set on realizing a lifelong dream to, say, open a distillery, you need to take a clear-eyed look at your expectations for turning a profit.

If you plan to work into your retirement years, financial advisors say there are a few factors to keep in mind.

Although we tend to assume that more money should always be the goal, a lucrative retirement gig could mean higher taxes and bigger medical insurance bills — and a potential haircut to your Social Security benefits. “People don’t look at how it impacts their other sources of income,” says Matt Nadeau, a wealth advisor at Piershale Financial Group near Chicago.

Hold off Drawing Social Security

Drawing Social Security earlier than full retirement age (that’s 67 years old for people born in or after 1960) reduces your monthly payment, so conventional wisdom says you should wait until full retirement age to claim if possible.

“With longer lifespans, it becomes more important to consider delaying Social Security,” says Christine Russell, senior manager of retirement and annuities for TD Ameritrade.

If you plan both to earn income and draw Social Security between the ages of 62 and when you reach full retirement age, take note: For that period of time, your Social Security benefits will drop by $1 for every $2 earned above $17,640, and $1 for every $3 earned above $46,920. These deductions stop after you reach full retirement age.

Calculate Your Provisional Income

The government uses a metric called provisional income to determine how much tax you pay on your Social Security benefits. This is calculated by adding wages, dividends and interest (both taxable and nontaxable), pensions and 50% of your annual Social Security benefits. Married retirees filing jointly with a combined annual provisional income of less than $32,000 do not have to pay federal income taxes on their Social Security benefits, but those earning from $32,000 to $44,000 have 50% of their Social Security taxed. Those with incomes of more than $44,000 have 85% of their Social Security taxed. (Note, that doesn't mean a tax rate of 85% — it's just that 85% of the benefit is subject to income taxes.)

There’s an important question you have to ask yourself, Nadeau says: "How much does each dollar of work impact my retirement plan?” He recommends engaging a financial advisor to help with the calculations. If you’re married and file jointly and your provisional income is over $44,000, then 85% of your Social Security is taxed, but "if you control your income a little bit, if you work just a little bit less, maybe it’s only taxed 50%,” he says.

Consider a Roth Conversion

And keep in mind that once you reach the age of 72, your provisional income will also include required minimum distributions (RMDs) from traditional IRA or 401(k) accounts. (The SECURE Act, passed late last year, raised the age for RMDs from 70½.) If you do the math and find out your RMD income will nudge you over the line into higher brackets for taxes and Medicare premiums, financial advisors suggest converting some of those assets into a Roth IRA before you turn 72.

“If they’re not working for a year or two, you’ll see folks do conversions then,” Russell says, since a drop in earned income that is not yet supplemented by Social Security benefits could put you into a lower tax bracket, an advantage when you need to pay taxes on Roth-converted funds.

Do the Medicare Math

How much you earn also impacts how much you pay for certain parts of Medicare. “Your Medicare Part B premium is based on your taxable income,” Russell says. An individual with an income of $87,000 or less pays $144.60 a month in 2020 for Part B, but someone with income from above $87,000 up to $109,000 pays $202.40 a month. The highest monthly premium, for individuals making $500,000 or above, is $491.60 (Note that your 2020 Part B premium is based on your 2018 income.)

Plan for Contingencies

Finally, experts say you should be realistic about the physical and mental feasibility of working well into your later years. Don’t assume you can take on additional debt since you plan to work into your 70s, because a a health crisis or other issue can derail those plans.

“The top reason why people thought they could work in retirement but then could not had to do with health — either their own health or that of a spouse or loved one they needed to give care to,” Russell says.

Russell says TD Ameritrade’s research finds that Americans want to keep their retirement options open, a benefit that can have rich rewards if you do your planning.

“One of the things that was very heartening is most people were considering working for mental fitness reasons. They want to work to keep their mind sharp,” she says.

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