Understanding the impact of a post-retirement job on retirement calculations

Employment after retirement does not always incur reductions in pension income, social security benefits or individual retirement account distributions. However, in certain cases abatement and possibly withdrawal of retirement income can occur. A few of the circumstances in which benefits can be affected are as follows:

• Early retirement
• Post-retirement income over a pension and/or government defined limit
• Corporate pension policy stipulations
• Federal and State laws and regulations

It is for the above reasons retirees might consider being fully aware of the restrictions their retirement income providers have in place. Additionally, issues such as taxation regulations, medical benefits and recipients of multi-national pensions can also have an important role in the decision to work after retirement. The following sections of this article illustrate the most common forms of retirement income and provide information regarding retirement income from those providers in the instance of employment after retirement.

Social Security

Social security benefits comprise a large amount of retirement income for Americans and Citizens of several countries world-wide. According to the U.S. Social Security Administration, a retiree who qualifies for social security benefits and has reached the retirement age for complete benefits may work without limit or deduction to their benefits. (www.ssa.gov)

However, since the social security administration allows for retirees to qualify for benefits prior to reaching the retirement age that qualifies them for full benefits, certain restrictions to income do apply. Specifically, the SSA can deduct up to 41.9% of total benefits if the pre-retirement age social security beneficiary receives an income higher than a predetermined amount i.e. higher than $12,960 as of 2007.

Government administered and/or contracted pensions

In the case of teachers, government employees and certain regulated industries, pension plans may replace the social security system. In the case such pensions, the rules can be different to that of social security recipients. For example, state laws and pension trustee regulations may stipulate limits on post-retirement salary, hours worked, and additional pension coverage from the new employer.

Corporate pensions

The Employee Retirement Income Security Act of 1974 regulates several private pension plans through the United States. This helps protects employees from losing their pensions in the event of corporate under-financing of pension funds. Nevertheless, corporate policies that fall within the scope of the Act, may have specific requirements an employee must follow in order to receive the pension funds. It may be prudent to consult the regulations mandated by the ERISA law in addition to the specific corporate pension guidelines before taking on employment after retirement.

Taxation of retirement income

Different countries have varying salary caps for taxation levels. As of 2007, in the United States, taxable incomes below $31,850.00 are taxable at the 15% level and taxable incomes above $64,250.00 are taxed at 25%. This 10% difference can cost a retired tax payer as much as $3150.00 in additional taxes just for being $1.00 over the tax bracket.

Add to this increased tax, possible reductions in pension benefits for surpassing salary caps and the additional employment may not be financially worthwhile. By considering the tax implications of post-retirement employment in tandem with pension and/or social security regulations, one can be better informed as to how to best approach the employment.

Budgeting expenses

Another important consideration in determining post-retirement employment calculations is estimated cost of living. One's calculations after accounting for social security, pension and taxation factors may leave one with a fixed budget. This budget should ideally account for expenses not covered by Medicare or unforeseen medical and other emergencies or a lifespan greater than expected.

International benefits

Depending on which country one lives similar variables and factors to those mentioned above may exist. If one is also receiving pensions from previous employment in foreign countries, this may also have an impact on one's total salary. If such income negates the income from a larger corporate pension, it may be advisable to forgo the former benefits.

Tips To Consider before Deciding to Work In Retirement:

• Contact Pension and Benefit Providers: Contract social security providers, pension providers and tax consultants can assist in the answering of important questions related to receipt of benefits.

• Income after Tax: Calculate post-retirement employment tax bracket using income estimates and compare the results with after tax income with less or no post-retirement employment. The benefits of being in a lower tax bracket may be worth more than the employment.

• Living costs: Determine the cost of living with inflation i.e. Add 2%/year to the annual cost of living. If retirement benefits do not cover this cost, employment may be necessary or cost cutting inevitable.

• Lifespan: Estimate individual lifespan using health related criteria, family history and living conditions to determine the number of years an inflation adjusted income will be needed. Some life insurance policies and individual retirement accounts may run out of funds or simply stop paying benefits after a certain age. Being prepared for such shortcomings is important.

There are many different variables in the calculation of retirement income with or without employment in retirement years. The most pertinent of factors is being assured one's pensions is secure, unconditional and unlimited in terms of years of payout. If any of these conditions is not met, an individual must adjust for them by either not working, working or re-budgeting one's retirement finances. After preparing sufficiently for retirement and taking into account the above factors, a retired individual may be better equipped to choose employment without worry or concern for financial matters.

Why you should retire

Why you should retire is a question some might not need to ask, but for those that do, there are plenty of reasons why. Retirement is an opportunity that opens doors that were previously closed prior to retirement.

Sometimes, retirement is a necessary step in life that makes possible new steps in different directions. Whether the retirement is voluntary or involuntary, some of those newly opened doors have dollar signs behind them.

• Employer provides severance package

Some employers will pay you to retire and don't give you a choice about it. Some employment contracts have clauses allowing severance pay under certain conditions. If such is the case, the severance package may entitle you to enough extra funds to consider retiring.

• Retirement hobby supplements income

If you've chosen to retire to pursue a hobby that otherwise would have been an unimplemented pursuit, that hobby may be monetized with the right decisions. In such case, retirement not only allows a chance to do something you enjoy and want to do, but also provides a potential additional source of retirement income, both of which could not be accomplished as easily without first retiring.

• Traditional IRA requires withdrawals

If you've reached the mandatory distribution age for Traditional Individual Retirement Account (IRA) withdrawals, there may not be enough time to spend it without retiring. Of course, this is something not every retiree has the luxury of, but it is a reason that many people have in their retirement financial tool box.

• You have a reverse mortgage

A reverse mortgage pays homeowners back based on the equity value of the home. This type of payment may supplement a retirement income to financially justify retirement. If the income isn't used, it can be reinvested to potentially earn retirement income at a higher yield than the housing market might provide. This type of income could also help finance retirement in later stages.

• Social Security Income allows it

In addition to IRA and reverse mortgage distributions, you may also qualify for Social Security payments. These payments may put your income over the top if you have several other sources of retirement income. Financially, there simply may be no reason why you should not retire if this is the case.

• You've become the recipient of a marital trust

For families with large estates, a marital trust may have been created to avoid heavy taxes upon death of a surviving spouse. Marital trusts make use of estate tax exemptions by passing on assets through a trust that optimizes tax benefits. An example of a martial trust is the A/B trust which divides inherited assets between a spousal and other beneficiary trust.

Several of the above reasons why you should retire are geared toward those whose retirement options and benefits apply by default. However, with the right decision making and financial planning, additional reasons why you should retire may also exist.

Even if you haven't reached retirement age, there may still be ample rationale for why you should retire. Moreover, unless you love your job, require one, and/or it brings you happiness beyond any motive for why you should retire, then there are plenty of explanations why you should retire sooner, rather than later if those reasons are financially workable.