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Like this article? Listen to Rande's related audio.  Back to Work After RetirementRecorded April 28, 2009 Retired but Thinking of Going Back to Work? Here Are Some Things You Need to Knowby Rande Spiegelman, CPA, CFP®, Vice President of Financial Planning, Schwab Center for Financial ResearchMarch 26, 2009 If you’re retired you may discover that your investment portfolio is insufficient to fund the retirement lifestyle you were hoping for. What do you do now? You may find that realistic solutions are limited: You can spend less, find other sources of income, or both. Perhaps spending less without drastically curtailing the quality of your retirement lifestyle might do the trick for you. But if you find that cutting expenses just isn’t enough—or isn’t a viable option, as you’ve already cut your spending to the bone—you might think going back to work is the only alternative. If you are considering returning to work, you probably have some questions related to issues such as Social Security benefits, health insurance, and taxes. To help you decide whether to go back to work, here are answers to some frequently asked questions: What financial issues should I take into account to determine if it would make sense for me to return to work? Going back to work involves new expenses, such as transportation, food, job attire, and possibly caregivers if you have dependents. There is also the potential effect of income and payroll taxes on your new and existing income. On top of that, there is the possible impact of the additional income on your Social Security benefits. You won’t know for sure how going back to work might affect your finances until you crunch the numbers for yourself. So we suggest that you create a budget and do some “what-if” planning. To get started, you can try an online tool like the Monthly Budget Planner at Schwab’s MoneyWise.com. Don’t hesitate to get help from your tax or financial professional to deal with the more complex tax and retirement benefit implications. (See the FAQs below for some examples.) I'm already collecting Social Security. How will going back to work affect my benefits? The answer depends on your age. For benefit purposes, the Social Security Administration (SSA) defines the full or normal retirement age (NRA) as between 66 and 67 for people born in 1943 or later. If you haven’t yet reached your normal retirement age, earning income could reduce your Social Security benefits:
Will my Social Security benefits be taxable if I return to work? Your Social Security benefits may be taxable, depending on your modified adjusted gross income (MAGI). As your MAGI increases above a certain threshold (from earning a paycheck, for instance), more of your benefits is subject to income tax, to a maximum of 85% of your benefits. For details, please see IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits. I've heard something about repaying Social Security for benefits I’ve already received and then restarting them later at a higher amount. Is this possible? Does it make sense? If you previously elected to receive early Social Security benefits at a reduced rate you have the option of paying back to the government what you’ve already received so you can restart benefits at a later date to take advantage of a higher payout. (You will receive your largest benefit by delaying retirement until age 70, so it never makes sense to wait past that age.) For example, let’s say you elected to receive early benefits at age 62 and you’re now 65 and thinking of going back to work. You could stop receiving Social Security, pay back the three years’ worth of benefits you received, go back to work, and then wait until age 70 to restart your benefit checks at a higher level. You don’t have to pay any interest on the benefits you’ve already received and there are no fees. For important details about repaying benefits please read the SSA publication, If You Change Your Mind. Whether it makes sense to take advantage of this option depends on your tax situation, your age, and life expectancy. Of course, you also have to come up with the repayment money. You might want to enlist the help of a CPA or other professional to help you crunch the numbers. If it makes sense for you, you can get the process going by filling out SSA Form 521, Request for Withdrawal of Application. Will eligibility for Medicare affect my potential health insurance benefits from my new employer? Eligibility for health insurance is one of the primary reasons many people under age 65 stay in (or return) to the work force. If you’re 65 or older and already covered by Medicare, be sure to check with your employer’s human resources department about how their insurance coverage would work with your Medicare. You can also check out Medicare and Other Health Benefits: Your Guide to Who Pays First. If you have private health insurance, carefully compare your benefits and coverage to what might be available at your new employer. Although group plans tend to be cheaper than individual policies, it might make sense to keep what you have rather than cancelling and hoping you can re-apply at a later date. This is especially true if you have retiree health insurance from a former employer. How might my pension (defined benefit) be affected if I return to work? The rules vary from plan to plan, so be sure to check with your pension plan provider and your new human resources department to see if returning to work will have any impact on your benefits. This is especially important if you plan to return to your former employer. Will I need to take required minimum distributions from my IRA if I go back to work? Do the same rules apply to a 401(k)? Working past age 70½ does not affect the required minimum distribution (RMD) rules for traditional IRAs—RMDs are still required. However, there are no RMD requirements for Roth IRAs. The rules for qualified employer plans, such as 401(k)s, are different. If you continue to work past age 70½, and do not own more than 5% of the business you work for, you should be able to postpone RMDs from your current employer’s plan until after you retire—to no later than April 1st of the year after retirement. Check with your plan administrator. Also see the 401(k) Resource Guide for Plan Participants at IRS.gov. For important details about RMDs please see the IRS topic Retirement Plans FAQs Regarding Required Minimum Distributions. If it turns out I end up making more than I actually need, can I start contributing again to my retirement accounts? As long as you have earned income and are under age 70½ you can contribute to a traditional IRA. Whether the contribution is tax deductible depends on your income if you’re also an active participant in an employer-provided plan. There are no age restrictions for Roth IRAs. For more information on IRAs please see IRS Topic 451, Individual Retirement Arrangements. Finally, you should be able to contribute to your employer’s qualified retirement plan regardless of your age as long as you’re still working there, but check with your plan administrator to be sure. If I go back to work, should I change my asset allocation to account for my newfound income? To build a retirement portfolio that has the best chance of lasting as long as you do, we recommend that retirees who rely on their investments for a significant portion of spendable income allocate at least 20% (conservative), but no more than 60% (moderate) to stocks. After periods of severe declines in stock prices, it’s understandable that some individuals might be inclined to become more conservative. But remember that, for long-term investors who continue to invest systematically over time, lower prices can also represent great opportunity. Regardless of market levels, our guidance remains unchanged: How much you continue to allocate toward stocks depends on your personal circumstances and on how much risk you are willing to take. You can get started by reviewing your investment portfolio with Schwab’s Portfolio Checkup tool. (Log into your account and click on Tools & Calculators under the Guidance tab.) While you’re there, be sure to check out Schwab’s Retirement Assessment tool for a reality check on sustainable portfolio withdrawals. Bottom Line If you are thinking about going back to work, only you can decide whether it’s worthwhile, considering both the financial and non-financial factors involved. Whatever your circumstances, take into account all sources of income and the tax status of your various retirement and regular brokerage accounts as you seek to write your own retirement paycheck. As always, contact your CPA or other trusted financial professional if you need help crunching the numbers. If you have questions or need help, please contact your Schwab consultant. If you're not yet a Schwab client but would like to learn more, a Schwab consultant can help. Call 800-435-4000 to get started. Important Disclosures The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner or investment manager. The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc. (1009-10476) Return to Top |
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