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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.
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.
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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.
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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 70ý 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.
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"Some of the most experienced
employees come out of retirement."
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| — Chris Cumming,
vice president of marketing at Diversified Investment Advisors. |
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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." |
