Financial Literacy - Retirement income planning
retirement
Should you work in retirement?

Thinking of working a bit longer and delaying your retirement? Mind the pitfalls. True, postponing retirement can have its advantages -- you can delay tapping your 401(k) nest egg and may even add to it while you're working.

But you can run into problems if you begin collecting Social Security checks or taking withdrawals from some tax-deferred retirement plans while you earn a paycheck. Generally speaking, overstaying your welcome at work could have some serious health care, Social Security and pension ramifications. Consider these four factors before signing on for another year.

Income tax

One of the most common caveats would-be retirees frequently fail to consider is that staying on the job an extra year might bump them into a higher tax bracket.

"People forget that any extra distributions or benefits they receive on top of their salary also count as income," says Kevin Seibert, managing director of the Lubbock, Texas-based think tank, the International Foundation for Retirement Education. "It's taxable, just like their regular salaries."

Working seniors can find themselves in a higher tax bracket in one of two ways -- by taking pension distributions on top of a regular salary or by taking Social Security benefits while they continue working, Siebert says.

Employees can easily sidestep the first pitfall by educating themselves on how close their current income is to the next tax bracket, and if their retirement plan has a mandatory distribution date. While employees who use a 401(k) plan as their primary retirement vehicle have the freedom to delay their distributions until after they officially leave the company, those enrolled in traditional IRA plans must start taking distributions no later than age 70½, whether or not they're still drawing an annual salary.

"In that case, it might make sense to plan ahead a little and start taking smaller distributions earlier to avoid being thrown into a higher tax bracket," Seibert says. "It doesn't make sense to start taking your retirement if you're going to pay it back in taxes."

A new law gives retirees a break from having to take a required minimum distribution from their IRAs in 2009. Many seniors experienced big losses in their IRA accounts in the recent stock market downturn, prompting lawmakers to waive distributions for this year only.

Taking Social Security benefits before you leave the company can have the same effect, says Yolanda M. York, a spokeswoman for the Social Security Administration. Single filers with total adjusted gross incomes of under $25,000 per year ($32,000 for married couples filing jointly) for the 2009 tax year won't have to pay income tax on their Social Security benefits. But for those earning more, up to 85 percent of their benefits are subject to income tax.

"A lot of people don't realize Social Security benefits are taxable," York says. "That's important when deciding whether to delay retirement."

Social Security benefits

Ken Steele, a Metlife senior financial planner based in Waltham, Mass., says that income tax isn't the only place where working seniors can lose money. Those who sign up for Social Security before the government-designated full retirement age will probably have their benefits withheld if they're also earning salaries.

"With Social Security, you're only allowed to earn about $14,160 (in 2009) before you start giving back $1 of Social Security for every $2 you earn," says Steele. "If people aren't mindful of that, they're going to lose a lot of money."

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That means that workers who are eligible for Social Security benefits (beginning at age 62), but under full retirement age (65, 66 or 67 depending on the year of birth) who draw, say, $1,000 per month in Social Security benefits, will have their entire benefits package withheld for a year if their annual salaries exceed $38,160. While it's not a permanent loss -- the Social Security Department will repay all withheld benefits in monthly increments after you officially leave the working world -- those relying on a fat check from the government may have to work with a significantly reduced one while they stay on the job.

Those who attain full retirement age in 2009 (but not until later in the year) have a much higher income threshold before benefits are withheld. According to the Social Security Administration Web site, these workers can earn $37,680 in 2009 ($3,140 per month) without penalty, after which $1 of Social Security will be subtracted for every $3 of extra income until the month they reach retirement age. Workers who don't collect Social Security until after the government-designated retirement age won't be subject to income restrictions at all, and "passive income" gained from sources such as investments or rental properties don't count in the formula either.

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