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Dos and Don’ts of Working After Retirement

Cheryl Winokur Munk,|Special to CNBC.com
Tuesday, 22 May 2012 | 8:19 AM ET

Many people today want or need to work part time after they officially retire.

Andersen Ross | Photodisc | Getty Images

High-interest, low-risk products, which used to provide retirees a nice cushion, are almost nonexistent today, and with people living longer the need for savings intensifies.

The problem is widespread.

Indeed, 60 percent of workers estimated that the total value of their household’s savings and investments (excluding their home and defined benefit plans) is less than $25,000, according to the 2012 Retirement Confidence Survey.

“Retirement today is not that of a generation ago. Gone is the day of a company pension, company-paid health care and secure Social Security,” says Ted Sarenski, president and chief executive of Blue Ocean Strategic Capital LLC in Syracuse, N.Y.

“Today’s retiree is faced with self-sufficiency and, as such, needs to work at least part time ‘in retirement’ to have enough money to pay the costs of living that were once paid by someone else,” he says.

Unfortunately, many people decide to retire without really thinking through the decision, then wind up returning to work, says David A. Littell, a professor at The American College who focuses on the financial issues of affording retirement.

This can have dire consequences for your financial security. If you’re considering heading back to the work force or think you might return there eventually, here are five things to consider.

  • 1. Age and income may reduce your Social Security benefits in the short term.

You can work part time and collect Social Security benefits, too.

But if you retire and begin to receive benefits before you reach what the government considers your “full retirement age,”then your Social Security benefits will be reduced by as much as 30 percent, depending on the year you were born. (The magic age is 66 for people born between 1943 and 1954.)

So for someone born in 1950 and who is retiring this year, a $1,000 monthly benefit would be reduced to $750.

On top of that, if you go back to work prior to full retirement age and earn more than a certain amount ($14,640 in 2012) the Social Security Administration will deduct $1 from your benefit payments for every $2 you earn above the annual limit.

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For example, say you start collecting Social Security benefits at age 62. You would be entitled to $9,600 in benefits for the year. Now say you work and earn $22,640 in 2012 ($8,000 over the limit of $14,640). Your Social Security benefits would be reduced by $1 for every $2 you earn above the annual limit, reducing them by $4,000 to $5,600 for the year.

After you reach your full retirement age, it is likely your monthly benefits will go up again.

Using an example from the Social Security Administration’s website, suppose you claim retirement benefits this year at age 62 and your payment is $750 per month. Then, you get a part-time job and have 12 months of benefits withheld. At full retirement age, you’d receive $800 a month (in today’s dollars).

Or, maybe you earn so much money between the ages of 62 and 66 that during those years all benefits are withheld. In that case, you’d get $1,000 a month starting at age 66.

In the short term, however, if you’re counting on a certain level of SSI benefits to supplement the income you’re earning from a part-time job, you’ll need to be aware of the rules.

“On the other hand, if you can afford to live on your earnings and other sources, getting a larger Social Security benefit later can improve long-term retirement security,” says Littell.

You can start your SSI benefits as early as 62 or as late as age 70. According to a 2011report by the Government Accountability Office, 43 percent of people take early retirement benefits at age 62, while almost 73 percent apply for benefits before they reach full retirement age.

There are benefits to waiting longer to collect Social Security, such as delayed retirement credits.

“If you can put off taking your benefits until after full retirement age, the difference over your lifetime is going to be significant,” says Tony S. Keena, a partner and private wealth manager with Estate and Business Planning Group in Altamonte Springs, Fla.

  • 2. Base your budget on after-tax figures, not before-tax amounts.

Many retirees who take part-time jobs set their budget based on their gross income, but they really should be looking at how much they will keep after taxes. Otherwise, they risk overspending, says Susan Bruno, managing director at Beacon Wealth Consulting in Stamford, Conn.

One common mistake people make is to assume they won’t pay taxes on any SSI benefits. This is not always the case. If you earned other income during the year, from a job or investments, up to 85 percent of your Social Security benefit may be taxable, depending on your tax filing profile, says Bruno.

Social security benefits are taxable as ordinary income for federal purposes. Most states with an income tax follow the federal tax rules and would thus treat the benefits as ordinary income as well. However, there are states, such as Connecticut, that have their own formula.

The Health Care Factor

Lilli Day | Photodisc | Getty Images

In addition, if you don’t set enough money aside or withhold enough money from your pay you could be in for an unwelcome surprise at tax time, says Ed Kohlhepp Sr., president of Kohlhepp Investment Advisors in Doylestown, Pa. Not only might you owe more taxes than you think, but you could also be hit with a penalty, he says.

  • 3. Consider your health care coverage.

“Health insurance is a huge concern if you’re going to retire before age 65,” says Sarenski of Blue Ocean Strategic Capital.

That’s because you don’t qualify for Medicare before age 65, so you’ll need to determine how you are going to pay for health care, which can cost tens of thousands of dollars if your spouse doesn’t have insurance or if you don’t get it through an employer, he says.

Having a part-time job that pays medical benefits can be a real boon during those in-between years, says Beacon Wealth's Bruno. Of course, such jobs can be hard to come by, but if you are lucky enough to find one, it could save you thousands of dollars a year in medical expenses.

In a few years, seniors who are too young to qualify for Medicare will face an additional burden as a result of federal health care reform. Starting in 2014, seniors in these in-between years will face an excise tax penalty if they don’t purchase “qualifying health insurance.” The excise tax for not having insurance will initially be 1 percent of adjusted gross income; by 2016 it will rise to 2.5 percent of adjusted gross income.

Even after you turn 65, when Medicare kicks in, it can be helpful to have additional health insurance through your employer because there are many gaps in Medicare, says Travis Freeman, a wealth manager at Four Seasons Wealth Management in Creve Coeur, Mo.

  • 4. Understand the pension equation.

Many pension plans calculate benefits using a formula that is based, in part, on your salary in the years before you retire.

If you decide to trade in your higher-paying position for a part-time one at the same company, it can make a big dent in what you otherwise would have received for your pension, says Freeman.

Unfortunately, he says too many people don't realize the folly of this strategy until they've already moved to a part-time job. It is better to discuss retirement early on with your pension administrator to determine whether your pension will be affected, he says.

  • 5. Cover your expenses.

Finally, before you take a job, make sure you’ll make enough, after taxes, to cover expenses.

There are many hidden costs to working that can add up quickly, including commuting, parking, clothing, dry cleaning and meals.

“Just buying a sandwich, with chips and soda can be $12. And that might be an hour of work—pretax,” says Bruno.

To be sure, people nearing retirement have a lot to think about, and the time to do it is before retirement, not after.

“People shouldn’t decide to give up their job until they determine how much they’ll need to live in retirement,” says Littell, the American College professor.

After crunching the numbers, they may be surprised about how little they will actually have to live on.

“Working longer and working part-time are two of the best strategies for improving your retirement picture,” says Littell.

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