3 Reasons Why Consulting After Retirement Can Be a Smart Move

Many of our clients who retire from large technology companies or start-ups have been approached with opportunities to consult or serve as a board member. While it’s tempting to step away from work entirely, there are several reasons why setting up a business and taking on part-time work may be beneficial for your overall retirement plan. For instance, being self-employed may grant you to access to more comprehensive health insurance coverage or enable you to do a mega backdoor Roth IRA conversion. It can also help ease your transition into full retirement both from an emotional and financial perspective.

1. Access Group Health Insurance in Retirement

One of the top concerns of those nearing retirement is obtaining and paying for health insurance coverage. Most retirees who are not yet eligible for Medicare opt to utilize COBRA for 18 months through their former employer before turning to the individual health insurance market. In general, most individual health insurance plans have higher deductibles and less comprehensive coverage when compared to employer-provided group plans. Individual plans tend to limit coverage within the state of your primary residence, which poses complexities if you want to spend summers in one location and winters in another. Individual plans often require referrals from your primary care physician, whereas group plans frequently allow for self-referral. Group plans also tend to include a broader range of providers in their networks. For these reasons, obtaining access to a group health insurance plan is highly appealing. Group plans can provide you with better options and more comprehensive coverage.

In the state of Washington, you can gain access to this type of coverage through a “micro group” plan, which is defined as a group plan covering one to three employees. To qualify, you must set up a business within the state of Washington and provide a W-2 reflecting your self-employment income from the previous year. Not all self-employed people pay themselves via a W-2; therefore, if you want to access this type of health insurance, you’ll likely need to set up an S Corporation to issue a W-2.

Note: there are pros and cons to setting up an S Corp. It’s important to review your business entity options with your CPA. Also, group health insurance plans may not be less expensive than what you find on the individual market, but the benefit is generally broader coverage.

2. Completing a Mega Backdoor Roth IRA Conversion with No Tax Implications

Another benefit of being self-employed is utilizing a self-employed 401(k), also known as a solo or individual 401(k). This type of retirement plan enables you to defer a portion of your pre-tax income into a 401(k) plan, similar to the one your employer may have offered. If you have a traditional IRA to which you have made after-tax contributions because your income exceeded the maximum for pre-tax contributions, then a solo 401(k) can be a significant saving opportunity. You can move the pre-tax dollars from your traditional IRA into your self-employed 401(k). Once your IRA contains only after-tax dollars, you can convert this balance to your Roth IRA tax-free (be careful not to roll any other pre-tax contributions into your traditional IRA in the same tax year that you complete the Roth conversion). This ability to complete a tax-free Roth conversion is a significant tax benefit. Additionally, you may be able to defer additional pre-tax dollars into your self-employed 401(k) (visit here for current annual contribution and catch-up contribution limits) – further boosting your savings and better securing your retirement.

3. Ease the Transition from Full-time Work into Full-time Retirement

Even if you’ve been diligent about mentally and financially preparing for your retirement, many people are hesitant to give up their primary source of income. Stock market declines suddenly become much more nerve-wracking, and the need to track spending can cause concern when you have been accustomed to freely spending while working. Even with thoughtful financial planning, some still find it difficult to achieve peace of mind during this transition. Having some part-time income after retirement can help ease these concerns and cushion your retirement plan.

Even if you are able to comfortably weather down-markets in early retirement, fully unplugging can come with significant mental health challenges. If you have derived a sense of meaning and purpose from your work, a rapid transition to retirement may leave you feeling aimless. This is a common cause of depression for new retirees. Continuing to stay active through consulting allows time for you to explore new interests and develop a routine, all while preserving the parts of your identity that bring you fulfillment.

Closing Thoughts:

We are often asked by clients approaching retirement if it is a good idea to take some time off before jumping into consulting work. While hard to quantify, it is important to consider the impact this might have on your social capital. For example, taking six months to a year off is not likely to be an issue, but if someone has been retired for several years, they are likely to find that their web of professional relationships, awareness of relevant trends, and overall perception in the industry will have atrophied.

If you’re considering self-employment after retirement, it’s important to discuss business structure with your CPA and attorney to make sure you’re properly set up. Doing so may enable you to access broader options for health insurance coverage, continue building your retirement savings, and help ease the stress around this big step for those choosing to retire early. Your Coldstream wealth management team is here to help you work through your retirement plan, determine sustainable spending, and recommend an appropriate portfolio allocation to support your retirement goals. Please reach out to us to discuss any of these ideas.

*All of Coldstream’s staff shall attain the required licenses and designations necessary for his/her position. Certified Financial Planner Board of Standards Inc. owns the certification marks CFP® and Certified Financial Planner™ in the U.S. The CFA Institute owns the certification marks CFA® and Chartered Financial Analyst®.