With Americans living longer, healthier, and more productive lives, it should come as no surprise that many are using their retirement years to work and earn.
Don’t expect this to show up as retirees hanging on to their same career paths, however. According to a recent study by the National Bureau of Economic Research, many older retirees are using this stage in life to change careers completely, often with a switch over to self-employment.
Data shows that this transition usually happens around the same time a retiree begins claiming partial or even full Social Security benefits. This trend is found more likely to happen among retirees with higher retirement wealth, regardless of whether they are scheduled to receive pension funds later in life. Does this mean that they are in a good position to take on the risk of a new self-funded business? Not necessarily.
A careful look at the tax returns of older workers shows that a longer wait to begin self-employment often resulted in lower wages. This drop is significantly more pronounced the longer a worker waits. Mid-career workers who made the transition to be their own boss didn’t show the same decrease in earnings, and even younger workers experienced a steady increase in income over the life of their self- employment. The longer a worker had to start a new business, the more stability was displayed in the earnings from that business.
With the statistics showing a potential to lose out on later-in-life earnings, one might wonder why retirees are more likely to take on the risk of self-employment. The answer lies in Social Security. As the name suggests, older American may feel they have a safety net to pursue the potential that self- employment promises. The monthly checks are more liquid than withdrawals from a pension or 401(k) fund and accessible to be used for start-up funding.
Additionally, as workers slow down — both in intensity of work and total weekly hours — it may seem natural to turn hobbies into income generators. If older Americans feel that they are free to pursue new interests, they may choose to turn these interests into an opportunity to create an income. The challenge is in reconciling the loss of lifetime earning potential that usually occurs when starting a new business at this stage in life.
The more traditional path of full-time self-employment leading to total retirement may not be as common as we once thought. The popularity of the “gig economy” will continue to allow older Americans to decrease total worked hours for a gradual ease into retirement, something that may be difficult to do with more traditional employment. Even though older workers gain much less financially as self-employed workers, the benefits of taking things at their own pace may prove to hold a value that can’t be measured in tax returns and wage statements.
This article was originally written on August 24, 2017 and updated on January 27, 2021.