There are more retired business owners now than ever before. According to AARP, the percentage of senior entrepreneurs nearly doubled in 2018 from what it was in 1996. Some opened a business due to job loss or the need to earn higher income while many did so voluntarily.
However, there are a few things to consider when starting a small business in your retirement, many of which involve your income. While starting a small business in retirement may be a smart idea for some, others may want to weigh the pros and cons before taking the plunge.
Too much income in retirement could mean penalties and fees
Once you start taking Social Security retirement benefits and Medicare, you’ll have to monitor your income to make sure it doesn’t exceed specific levels. If it does, you could have money withheld from your retirement benefits and be assessed an income-related monthly adjustment amount (IRMAA) for your Medicare premiums.
Income limits for Social Security retirement benefits
Income restrictions for Social Security retirement benefits vary by age. For example, if you are at least full retirement age for the entire calendar year, you have no income restrictions. However, if you’re under your full retirement age for even part of the year, you’ll want to monitor your income from your small business.
Your full retirement age (FRA) depends on when you were born. For example, if you were born in 1960 or later, your FRA is 67. However, if you were born in 1957, your FRA is 66 and 4 months. If you’re under your FRA for the entire year, your income limit in 2021 is $18,960. If you make any more than $18,960, $1 will be withheld from your Social Security benefits for every $2 you make beyond the limit. Note that this only affects people who are already taking their Social Security benefits.
For example, if you make $25,000 in 2021, $3,020 will be withheld from your Social Security benefits. If your benefits check is $1,000, the offset is equal to about three full months of benefits. But don’t worry too much; you’ll get this withheld money back at a later date.
If you reach your FRA sometime during 2021, your income limit is $50,520. You’ll have $1 withheld for every $3 you earn over the limit. For example, if you make $55,000 in 2021, $1,493 will be withheld from your benefits.
Income limits for Medicare premiums
Medicare sets the standard base premium each year for Medicare Part B. However, if you made over a certain amount two years prior, you could be assessed an IRMAA and be required to pay more for your Part B benefit. If you are assessed an IRMAA, your Part D premium will also cost more. The SSA uses your income taxes filed two years prior to the current year, as those are usually the most recent tax filings they have for you.
For example, if, in 2019, you made more than $88,000 as an individual or $176,000 as a married couple filing jointly, then your 2021 Part B and Part D premiums will be higher than the base premiums. Therefore, if you started taking benefits at retirement, and later started a small business before reaching your FRA and made more than $88,000 as an individual, not only will your Social Security benefits be withheld, but you’ll pay more for your Medicare benefits.
Self-employed and small employer insurance usually isn’t creditable for Medicare
Many people think if they have any form of insurance, then they can delay Medicare enrollment. However, unless you are actively working for an employer with 20 or more employees and are enrolled in their group health insurance, this isn’t true. The only way you can skip Medicare enrollment at 65 is to have active large employer group coverage.
Insurance plans through a small employer or individual plans through the Affordable Care Act (ACA) are not creditable coverage for Medicare Part A and Part B. Therefore, if you don’t enroll in Medicare when you’re supposed to or enroll and later disenroll because you started a small business, then you will be assessed late penalties for as long as you have Medicare
Starting a small business in retirement can be the perfect way to transition from a full-time, nine-to-five job to retirement. You can be your own boss, set your own schedule, and still enjoy retirement. However, if you already started Social Security benefits and plan to earn a substantial income, be aware of the things mentioned above. You’ll want to consider these when starting a small business in your retirement.