Returning to Work, from Retirement

By Matthew Lea
Editor, mPower

In This Story 401(k) Workout The Taxman and Social Security The Order of Your Affairs

The reasons retirees give for returning to work are numerous. Some seek a social climate. Some have sequestered dreams they want to bring to light. Some need to continue to save for retirement. Still others simply want a break from their spouse.

Whatever the reason, more and more seniors are reentering the work force, and the trend will likely gain momentum now that most can earn money without reducing their Social Security benefits. If you fall into this category, here's what you need to know about taxes, 401(k)s, IRAs, and federal benefits.

minute: read this article at a glance.

Retirement, in the traditional sense, is the psychological equivalent of winning the lottery: It can be the time of your life if you're adequately prepared for it, but if you're not, the newfound freedom can bring unforeseen changes that leave you oddly nostalgic about your working life.

Sixty-seven percent of workers expect to work for pay after retiring, according to the 2000 Retirement Confidence Survey co-sponsored by the Employee Benefit Research Institute.

These financial, emotional or psychological changes often contribute toward pushing retirees back into the work force.

Life expectancies have increased, but not everyone has planned for a 30-year retirement — some find the job of their dreams late in life, some get bored without the social interaction a job provides, and some are rekindling projects that were on the back burner for 40 years. Ann Copeland, certified financial planner and president of Financial Planners Associates in Puget Sound, has a client who decided to go back to work to get away from her husband.

Whatever the reason, many seniors are eschewing "traditional" retirement. The recent elimination of the Social Security test limit will probably fuel this trend.

Sixty-seven percent of workers expect to work for pay after retiring, according to the 2000 Retirement Confidence Survey co-sponsored by the Employee Benefit Research Institute (EBRI). Further, in 2000, 25 percent of retirees say they have worked since they retired.

Everyone opting to begin working again should be aware of how this will impact their 401(k) and IRAs, their taxes, and their Social Security benefits.

401(k) Workout

Retirees in their 60s or even 70s who are going back to work, either to accumulate or increase their retirement money, can take solace in the knowledge that 10 years of compounding can help them build a decent retirement account.

If you fall into this category, the best thing to do is to open a 401(k) account if your employer offers one, said Chris Cumming, vice president of marketing at Diversified Investment Advisors. As long as you are working, you can contribute to a 401(k) account; and due to a recent change in the law, active employees over 70½ no longer have to take mandatory withdrawals.

Given the choice of contributing to an IRA or 401(k), Cumming advises to go with the 401(k) for these reasons:

• Higher annual contribution limit, at $10,500 versus $2,000 for an IRA.
• You can take advantage of the employer match.
• Your 401(k) money is protected from creditors if you declare bankruptcy.
• 401(k) fees are generally lower than those associated with IRAs.
• 401(k) plans have fiduciaries who are responsible for making sure the plan operates in the best interests of the participant, including the investment options. You'll have to do more of your own research with an IRA.

You should be aware of a couple of issues with 401(k)s. Some plans make new employees wait a year before they can begin to contribute. Because retired workers need to take advantage of the interest compounding of tax-deferred accounts as quickly as possible, those who have to wait should begin contributing to an IRA immediately.

Another thing to watch for with 401(k)s, said Cumming, is the vesting schedule of employer matching contributions. Most plans vest these contributions over a 4 year or 5 year period, with an equal percentage of the employer match becoming accessible each year. The money you contribute is always yours. But, make sure you think about how long you intend to be with a particular employer if you have calculated the employer match into your financial decisions.

If you don't need to build a retirement account, returning to work can give your existing retirement accounts the opportunity for huge growth. Holding off on taking withdrawals can really boost your total balance. If you had a $300,000 401(k) balance at age 65, waited another 10 years to take retirement and made no further contributions, with a 10 percent rate of return your account would grow to $778,122. If you waited five years, under the same conditions, your account would grow to $483,153.

The Taxman and Social Security

Retirees returning to work need to plan carefully to minimize income taxes. The combination of income earned from working and income drawn from Social Security, or a retirement account, can easily push even a part-time employee into the 28 percent tax bracket.

The trick to working after retirement, from a tax perspective, is to avoid being forced into a higher tax bracket; or forced to not take a job because it would be too expensive.

Copeland said she had a client who decided to take Social Security payments as soon as he retired, and then was offered his dream job shortly after retiring. The man no longer needs the Social Security disbursements and has jumped up into the next tax bracket due to the dual incomes.

"The best thing for people to do is not take Social Security the minute they retire," advises Copeland. She tells her clients to build up a retirement fund before they retire so they can live off of that for a while and see how retirement feels. This will also give retirees an opportunity to decide what they really want to do.

Recently, the federal government eliminated the earnings limit for Social Security, unchaining recipient workers whose earning potential was bound by possible Social Security disbursement reductions. Previously, workers 65 through 69 lost $1 in Social Security benefits for every $3 in wages they made above $17,000.

One note for early retirees: Those between 62 and 64 who want to retire partially and take Social Security are still subject to a $1 benefit reduction for every $2 they earn over $10,080 in 2000.

Holding off on taking Social Security when you are first eligible can increase your eventual distributions. Each additional year you work adds another year of earnings to your Social Security record. Higher lifetime earnings may result in higher benefits when you retire. Further, your benefit will be increased by a certain percentage if you delay retirement. These increases, called delayed retirement credits, will be added in automatically from the time one reaches full retirement age until that individual starts taking benefits or reaches age 70.

The Order of Your Affairs

The first thing retirees returning to work need to do is sit down and figure out the state of their retirement finances. In fact, Copeland suggests to her clients that the appropriate time to think about working after retirement is before they retire.

"Some of the most experienced employees come out of retirement." — Chris Cumming, vice president of marketing at Diversified Investment Advisors.

Returning workers should know all of the tax implications, mandatory withdrawal times and amounts for their tax-deferred accounts, when their federal benefits kick in, and a rough estimate of current and foreseeable medical costs.

Here are some numbers to keep in mind. If you were born after 1943, you won't qualify for full Social Security benefits until you reach age 66. If you were born after 1960, you won't get full benefits until age 67. You can request a statement of estimated earnings online from the SSA, or by calling them at (800) 772-1213.

Medicare begins to help with medical bills when you turn 65. You may also be able to receive medical coverage from your new employer.

One trend that worries Copeland is retirees using their tax-deferred retirement money to begin a new business. If they declare bankruptcy, they will have exhausted their retirement reserves and will most likely have to work the rest of their life, she said.

Returning to work can help bolster not only a weak retirement account but also the physical and mental health of a person not fully prepared for the idleness that sometimes comes with retirement.

And, the fact that more and more seniors are rejoining the ranks of the working is a boon not only for workers but for businesses. As Cumming points out, "Some of the most experienced employees come out of retirement."

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.

Returning to Work, from Retirement

By Matthew Lea
Editor, mPower

In This Story 401(k) Workout The Taxman and Social Security The Order of Your Affairs

The reasons retirees give for returning to work are numerous. Some seek a social climate. Some have sequestered dreams they want to bring to light. Some need to continue to save for retirement. Still others simply want a break from their spouse.

Whatever the reason, more and more seniors are reentering the work force, and the trend will likely gain momentum now that most can earn money without reducing their Social Security benefits. If you fall into this category, here's what you need to know about taxes, 401(k)s, IRAs, and federal benefits.

minute: read this article at a glance.

Retirement, in the traditional sense, is the psychological equivalent of winning the lottery: It can be the time of your life if you're adequately prepared for it, but if you're not, the newfound freedom can bring unforeseen changes that leave you oddly nostalgic about your working life.

Sixty-seven percent of workers expect to work for pay after retiring, according to the 2000 Retirement Confidence Survey co-sponsored by the Employee Benefit Research Institute.

These financial, emotional or psychological changes often contribute toward pushing retirees back into the work force.

Life expectancies have increased, but not everyone has planned for a 30-year retirement — some find the job of their dreams late in life, some get bored without the social interaction a job provides, and some are rekindling projects that were on the back burner for 40 years. Ann Copeland, certified financial planner and president of Financial Planners Associates in Puget Sound, has a client who decided to go back to work to get away from her husband.

Whatever the reason, many seniors are eschewing "traditional" retirement. The recent elimination of the Social Security test limit will probably fuel this trend.

Sixty-seven percent of workers expect to work for pay after retiring, according to the 2000 Retirement Confidence Survey co-sponsored by the Employee Benefit Research Institute (EBRI). Further, in 2000, 25 percent of retirees say they have worked since they retired.

Everyone opting to begin working again should be aware of how this will impact their 401(k) and IRAs, their taxes, and their Social Security benefits.

401(k) Workout

Retirees in their 60s or even 70s who are going back to work, either to accumulate or increase their retirement money, can take solace in the knowledge that 10 years of compounding can help them build a decent retirement account.

If you fall into this category, the best thing to do is to open a 401(k) account if your employer offers one, said Chris Cumming, vice president of marketing at Diversified Investment Advisors. As long as you are working, you can contribute to a 401(k) account; and due to a recent change in the law, active employees over 70½ no longer have to take mandatory withdrawals.

Given the choice of contributing to an IRA or 401(k), Cumming advises to go with the 401(k) for these reasons:

• Higher annual contribution limit, at $10,500 versus $2,000 for an IRA.
• You can take advantage of the employer match.
• Your 401(k) money is protected from creditors if you declare bankruptcy.
• 401(k) fees are generally lower than those associated with IRAs.
• 401(k) plans have fiduciaries who are responsible for making sure the plan operates in the best interests of the participant, including the investment options. You'll have to do more of your own research with an IRA.

You should be aware of a couple of issues with 401(k)s. Some plans make new employees wait a year before they can begin to contribute. Because retired workers need to take advantage of the interest compounding of tax-deferred accounts as quickly as possible, those who have to wait should begin contributing to an IRA immediately.

Another thing to watch for with 401(k)s, said Cumming, is the vesting schedule of employer matching contributions. Most plans vest these contributions over a 4 year or 5 year period, with an equal percentage of the employer match becoming accessible each year. The money you contribute is always yours. But, make sure you think about how long you intend to be with a particular employer if you have calculated the employer match into your financial decisions.

If you don't need to build a retirement account, returning to work can give your existing retirement accounts the opportunity for huge growth. Holding off on taking withdrawals can really boost your total balance. If you had a $300,000 401(k) balance at age 65, waited another 10 years to take retirement and made no further contributions, with a 10 percent rate of return your account would grow to $778,122. If you waited five years, under the same conditions, your account would grow to $483,153.

The Taxman and Social Security

Retirees returning to work need to plan carefully to minimize income taxes. The combination of income earned from working and income drawn from Social Security, or a retirement account, can easily push even a part-time employee into the 28 percent tax bracket.

The trick to working after retirement, from a tax perspective, is to avoid being forced into a higher tax bracket; or forced to not take a job because it would be too expensive.

Copeland said she had a client who decided to take Social Security payments as soon as he retired, and then was offered his dream job shortly after retiring. The man no longer needs the Social Security disbursements and has jumped up into the next tax bracket due to the dual incomes.

"The best thing for people to do is not take Social Security the minute they retire," advises Copeland. She tells her clients to build up a retirement fund before they retire so they can live off of that for a while and see how retirement feels. This will also give retirees an opportunity to decide what they really want to do.

Recently, the federal government eliminated the earnings limit for Social Security, unchaining recipient workers whose earning potential was bound by possible Social Security disbursement reductions. Previously, workers 65 through 69 lost $1 in Social Security benefits for every $3 in wages they made above $17,000.

One note for early retirees: Those between 62 and 64 who want to retire partially and take Social Security are still subject to a $1 benefit reduction for every $2 they earn over $10,080 in 2000.

Holding off on taking Social Security when you are first eligible can increase your eventual distributions. Each additional year you work adds another year of earnings to your Social Security record. Higher lifetime earnings may result in higher benefits when you retire. Further, your benefit will be increased by a certain percentage if you delay retirement. These increases, called delayed retirement credits, will be added in automatically from the time one reaches full retirement age until that individual starts taking benefits or reaches age 70.

The Order of Your Affairs

The first thing retirees returning to work need to do is sit down and figure out the state of their retirement finances. In fact, Copeland suggests to her clients that the appropriate time to think about working after retirement is before they retire.

"Some of the most experienced employees come out of retirement." — Chris Cumming, vice president of marketing at Diversified Investment Advisors.

Returning workers should know all of the tax implications, mandatory withdrawal times and amounts for their tax-deferred accounts, when their federal benefits kick in, and a rough estimate of current and foreseeable medical costs.

Here are some numbers to keep in mind. If you were born after 1943, you won't qualify for full Social Security benefits until you reach age 66. If you were born after 1960, you won't get full benefits until age 67. You can request a statement of estimated earnings online from the SSA, or by calling them at (800) 772-1213.

Medicare begins to help with medical bills when you turn 65. You may also be able to receive medical coverage from your new employer.

One trend that worries Copeland is retirees using their tax-deferred retirement money to begin a new business. If they declare bankruptcy, they will have exhausted their retirement reserves and will most likely have to work the rest of their life, she said.

Returning to work can help bolster not only a weak retirement account but also the physical and mental health of a person not fully prepared for the idleness that sometimes comes with retirement.

And, the fact that more and more seniors are rejoining the ranks of the working is a boon not only for workers but for businesses. As Cumming points out, "Some of the most experienced employees come out of retirement."

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.