RETIREMENT PLANNING

A Second Career

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So now you've done it. You've retired from the rat race, and you're enjoying the good life. You're sipping on your Mai Tai and contemplating the mysteries of your navel. You're on the verge of developing that One True Theory of Lint. Working again is the farthest thing from your mind. Who needs that routine when there's so much more to do? Suddenly, a wild thought intrudes on your meditations. Is it possible that you could (gasp!) reenter the workforce? But why would you want to?

You might -- particularly if you retired before you became eligible for Social Security payments. As you recall, that check can't come until you are at least age 62. 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, desire some "mad" money, or just want to have time away from your life's partner. Many retirees do. Further, they work because they want to, not because they have to. They just enjoy it. But what does it mean financially when they return to work?

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 serves to increase 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, and use the best 35 of the 40 highest years' earnings. If you have a lot of zero-income years, that will lessen your ultimate benefit. Retire early, and you're bound to have a lot of those zero-income years. They will cause your Social Security check to be smaller than it could be. Resume work, and you'll pay into the Social Security system again, thus offsetting those zero-income years and increasing your benefit.

Is that a reason to go back to work? It might be. Then again, it might not. 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 come at a higher cost than you might have otherwise thought.

For those who do go back to work, at ages 65 and older there is no worry. Younger retirees, though, may see a reduction in their Social Security checks, depending on how much they earn in wages during the year. From ages 62 through 64, if you receive a Social Security check, you must forfeit one dollar of that check for every two dollars you earn above a certain maximum earnings limit. That limit moves upward each year with inflation. In 2001, the limit is $10,680. Thus, a Social Security recipient who was age 63 and who receives $11,680 in wages in 2001 will be over the maximum earnings limit by $1,000. That excess will cause a $500 reduction in the Social Security benefits that person receives in 2001.

If you are under age 65 and return to work after you begin receiving your Social Security benefit, estimate what you will earn for the year and 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. It will recoup that overpayment from the following year's checks. You might not be working that year and may need your full Social Security payment.

What if your estimate was wrong and you didn't earn as much as you thought you would? In that instance, 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. Each of us must evaluate both. The Foolish point to remember here is to recognize the impact such work has on our Social Security benefits. Our endeavors may increase what we get from the system and -- possibly at the same time -- reduce the check we currently receive.

To close, consider the words of Oscar Wilde: Work is the curse of the drinking classes.

Fool on, and have a Mai Tai for me. Now, what to do with one of your biggest assets -- your home.

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