Forget bingo! More Americans are working part-time in retirement

Mandy Hummel needed a change. A resident of Grass Valley, Calif., located outside Sacramento in the foothills of the Sierra Nevada mountains, Ms. Hummel had spent the last several years of her career working in customer service for a company that manufactures and installs leaf-protection systems for gutters. But faced with a pay cut and unwanted changes in her job, Ms. Hummel retired in 2015, when she was 60 years old. She began driving part-time for Uber and, more recently, Lyft, both popular ride-hailing services. The part-time work provides a supplemental income to Social Security for Ms. Hummel and her husband, who at 64 still owns a sign-making business, and gives her the flexibility to travel to Los Angeles a few days every other week to help care for her 6-month-old grandson, Nino. "You don't have to say 'no' to anything that you want to do," said Ms. Hummel, now 62. She's just one of a growing number of Americans who are deciding to retire from full-time employment and, whether due to concerns about their financial, social, physical or psychological well-being, take on part-time work in some capacity. It's a trend that financial advisers can't afford to ignore since it cuts across so many aspects of a retiree's life. "Work is part of retirement plans for most people in some respects these days, even wealthy people," said Kerry Hannon, a work and jobs expert at AARP Inc. "As an investment adviser, you can do your clients a big service by helping them figure out how they can do it."

PART-TIME FEVER

About half of retirees today either have worked or plan to work in retirement, according to a joint study conducted by Bank of America Merrill Lynch and Age Wave. That number is set to escalate in the coming years, with 72% of pre-retirees over the age of 50 saying their ideal retirement includes work in some capacity. Thirty-five percent of that group says part-time work is their ideal route. Longer life expectancies and swelling health-care costs have made it more difficult for people to fund retirement, which could now feasibly last nearly as long as one's working years. So for some, continuing to work may be a financial necessity.

FINANCIAL SAFETY NET

Part-time employment income can serve as a financial safety net, allowing retirees to put off drawing from their retirement accounts while they continue to contribute to them. It also allows them to defer claiming Social Security benefits until they are at or near 70 to boost the payout from the federal government, for example. But nonfinancial considerations are as, if not more, important in many cases. Indeed, retirees ranked money below staying mentally and physically active and having social connections in the hierarchy of reasons they kept working, according to the Merrill Lynch study. "In my conversations with clients, I regularly encourage people who are retiring to look for another career, whether they need the money or not," said Neal Solomon, managing director at WealthPro. "Those people who remain active tend to remain healthier and have better attitudes." Increasingly, retirees and pre-retirees are taking the route of starting a busness for part-time work. An aging population has led to a rising share of new entrepreneurs among those between 55 and 64 years old, according to the Kauffman Foundation's most recent annual report on start-up business activity. This demographic represented 24% of new entrepreneurs in 2015, compared with 15% in 1996; the share for younger age groups over the same time period either dipped or remained flat. One reason for this trend: With the rise of digital commerce, seniors can start businesses more easily and on the cheap. The large amounts of capital needed to start brick-and-mortar shops aren't required for online stores, said Ms. Hannon of AARP, author of such books as "Getting the Job You Want After 50 for Dummies."

Marilyn Arnold got the entrepreneurial bug when she was 63 years old. Ms. Arnold, who lives in a suburb of Kansas City, had wanted to work in fashion design ever since she was growing up on a farm in northeast Missouri and learned how to sew from her mother. So after working nearly three decades in the financial services industry, most recently in a management position at New York Life Insurance Co., Ms. Arnold retired and used $12,000 in an old IRA to start Marilyn Arnold Designs. Her firm uses the fabric from old wedding dresses to make pillows and other items. "Sometimes you just get to the point where it's time to do something different," said Ms. Arnold, now 69. "I don't really need the money. I really do it more for fun. It just makes me feel good about me." Ms. Arnold got the idea to branch into a post-retirement career in a discussion in 2010 with her accountant. "She asked me, 'What did you want to be as a little girl?' I told her I wanted to be a fashion designer, and she said, 'Well, why don't you do that now?'" Ms. Arnold said. "So I thought about it." Just asking these sorts of questions — "Have you thought about what's next?" "What would you like to be doing right now?" — is a good starting point for advisers, said Lisa Kirchenbauer, president of Omega Wealth Management, who specializes in entrepreneur clients and those in significant financial transition. Because many people transitioning into retirement aren't necessarily "entrepreneurially built," Ms. Kirchenbauer conducts assessments to see who needs more coaching to be successful in their ventures. "We're a thinking partner, as well as a financial adviser," she said. Such coaching could be as simple as helping set up the company, establishing necessary financial accounts and managing taxes. For example, sometimes she'll have clients set up a Solo 401(k) — a 401(k) plan covering a business owner with no employees — so come tax season, the client has the flexibility to make a contribution and potentially dip into a lower marginal income tax rate. Clients may need to go back to school for classes or certifications, start networking and shift investments around in their portfolios to adequately prepare for their careers in business, Ms. Kirchenbauer said. That's why advisers ideally should begin these conversations early, when clients are in their mid-50s, she said.

'HARD CHOICES'

Whether a client plans to be an entrepreneur or not, the most important thing advisers can help with as clients move into part-time retirement is cash-flow planning and how to structure a portfolio to cover their expenses, Ms. Kirchenbauer said. "If you're making $200,000, $300,000, $400,000 or more, you don't need to pay attention to cash flow," she said. "But that's a really important part of considering a transition," since income most likely will be reduced. "What we find is people often have to make hard choices" to retire part-time and maintain their lifestyle, said Mr. Solomon of WealthPro. Health care is one of the most difficult cash-flow factors, advisers said. For Christopher Van Slyke, partner at WorthPointe Financial, Medicare eligibility is the second-most important question to pose, after asking clients why they want to retire part-time. Medicare, the federal health-insurance program for older Americans, only covers those ages 65 and older. So someone hoping to retire prior to this age probably would need to buy non-employer-subsidized insurance on the open market, likely at an expensive rate, Mr. Van Slyke said. However, he and other advisers said the Affordable Care Act, which allows seniors to buy individual insurance policies fairly cheaply even if they have a preexisting health condition, has to a large extent diluted the severity of the problem for pre-retirees. "It really was a game changer for people to be able to do this," Mr. Van Slyke said. "We're talking $30,000, $40,000, $50,000 in premiums for a 62-year-old" prior to the ACA, known informally as Obamacare. Because of this dynamic, Mr. Van Slyke's clients are retiring part-time before turning 65 with more regularity. "It's become a nonissue, whereas before it became the issue," he said. Although situations vary, part-time retirees could end up paying less in health premiums under Obamacare than through their full-time employer if their wages dip to a level triggering income-dependent subsidies that are available, advisers said. But given the continuing political uncertainty surrounding Obamacare and its potential repeal, those who aren't yet eligible for Medicare must consider the prospect that it may not exist in a few years' time, advisers said.

FILING EARLY

Mandy Hummel, the part-time retiree driving for Uber and Lyft, is an example of someone covered under Obamacare. Her adviser, Neela Hummel, a partner at Abacus Wealth Partners and her daughter-in-law, also recommended she claim Social Security at 62, the earliest age at which benefits become available.

Although it's common practice in financial circles to try to delay claiming until age 70, which yields the highest benefit payout, claiming early made sense for Ms. Hummel from a cash-flow perspective. Income from her husband's sign-making business is largely dependent on local election cycles, and can fluctuate greatly from year to year. Social Security provides predictable monthly income during those periods, Neela Hummel said. (2016 Investmentnews 40 Under 40 honoree: Neela Bushnell Hummel) "Advisers say delay, delay, delay, but for some people the quality-of-life situation can encourage them to take earlier," she said. Of course, additional income from part-time work may allow retirees to delay claiming. But those clients who decide to claim Social Security benefits early and continue working may find that their benefits are reduced. For example, the Social Security Administration deducts $1 from benefit payments for every $2 individuals earn above an annual limit of $16,920 in 2017. That applies to individuals under "full retirement age" (age 66 for anyone born from 1943 to 1954) for the entire year. In the year they reach full retirement age, the SSA deducts $1 for every $3 earned above a different limit: $44,880 in 2017. "Once you turn 66, the earnings limit disappears and any benefits lost to the earnings cap would be restored in the form of larger monthly benefits," said Mary Beth Franklin, a Social Security expert and contributing editor at InvestmentNews.

TAXES

Working part-time may affect clients' tax brackets for ordinary income and capital gains taxes, and afford them some benefits. For example, part-time retirees contributing to regular individual retirement accounts or Roth IRAs could qualify for the little-known saver's credit, said Andrew Sivertsen, part owner of The Planning Center Inc. The tax credit, which is available to low- to moderate-income individuals, basically gives savers up to $1,000 for putting $2,000 in their retirement account, Mr. Sivertsen said. Clients may also benefit from Roth conversions, Ms. Hummel said. The strategy allows clients to convert from a traditional IRA to a Roth IRA and pay income tax on the converted amount; that may benefit clients if they're in a lower marginal income tax bracket as a result of part-time work.