Retirement Step 7: A Second Career

Retirement Step 7: A Second Career

At last, you've retired from the rat race to enjoy the good life. Working again is the farthest thing from your mind. Who needs that routine, when there's so much more to do? However, a second career could ultimately be a smart move -- especially if you retire before you're eligible for Social Security.

As you recall, that check can't come until you are at least age 62. And even if you're already drawing Social Security, you may decide to resume work simply because you enjoy the personal contact with others. Maybe you want to feel more productive, you'd like some "mad" money, or you need to some time away from your spouse or partner. Many retirees work because they want to, not because they have to. They just enjoy it. But what does a return to work mean financially?

It's all in the timing
The financial impact of a second career depends largely on the age at which you resume work. For those younger than age 62, a job increases the ultimate benefit they will receive when they take Social Security. In computing that benefit, the system looks at a person's entire working life. The computations are complicated, using the best 35 of the 40 highest years' earnings. A lot of zero-income years will lessen your ultimate benefit. Retire early, and you're bound to have a lot of those zero-income years, shrinking your Social Security payout. Resume work, and you'll pay into the system again, thus offsetting those zero-income years and increasing your benefit.

Is that a reason to go back to work? It's entirely up to you. If you've done a Foolish job in planning for retirement, increasing your ultimate Social Security payment may not be an important factor to you. But be aware that an early retirement may cost you more than you think

Those who do go back to work before their Social Security "full retirement age" (FRA) -- from age 65 to 67, depending on age of birth -- may see a reduction in their Social Security checks, depending on how much they earn in wages during the year. From ages 62 through the year before full retirement age, you must forfeit one dollar of any Social Security funds you receive for every two dollars you earn above a certain maximum earnings limit. That limit moves upward each year with inflation. In 2011, it will be $14,160. Thus, a 63-year-old Social Security recipient who receives $15,160 in wages in 2010 will surpass the maximum earnings limit by $1,000, causing a $500 reduction in his or her 2011 Social Security benefits.

Paychecks pay off
You can work as much as you want after your full retirement age without seeing a drop in your Social Security benefit. In fact, your benefit may increase, since the Administration will factor in your last year of work in calculating each year's benefit.

If you return to work after you begin receiving your Social Security benefit but before your full retirement age, estimate what you will earn for the year, then compare that amount to that year's maximum earnings limit. If you see you will exceed that limit, tell Social Security immediately. The agency will reduce your monthly check accordingly. Fail to do so, and those earnings will be reported to Social Security anyway when you file your income tax return for the year. The Social Security Administration (SSA) will then notify you of an overpayment because of excess earnings, and recoup that overpayment from the following year's checks.

What if your estimate was wrong, and you didn't earn as much as you thought you would? The SSA will restore the previously withheld benefit. You won't have lost a penny, but you will have avoided an overpayment.

Working after retirement has its good points and its bad points. Fools should simply keep in mind how that work might increase (or decrease) their Social Security benefits. As Oscar Wilde famously lamented, "Work is the curse of the drinking classes."

Now, on to Step 8: what to do with your home.

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