Returning to work? Consider total financial picture

Once a person retires, will he or she ever return to work?

Many think they'll do just that. In fact, 67 percent of workers today expect to work for pay after retiring, according to a survey by the Employee Benefit Research Institute.

Those who do end up going back to work need to some planning because earned income will affect virtually every financial aspect of retirement.

Taxes

The first issue to think about is taxes. The combination of earned income and the income drawn from Social Security or a retirement account can push the individual into a higher tax bracket.

That's become more of a concern recently, following the passage of a law that allows workers 65 and over to earn as much as they want without losing any Social Security benefits.

What can be done to prevent this "bracket creep" during retirement?

Delayed benefits

For one thing, if an individual doesn't start taking Social Security distributions retirement, he may be able to go back to work without being forced into a higher bracket.

Furthermore, by delaying taking Social Security payments until full retirement age, and by adding extra years of earnings, he may well increase his eventual distributions.

Before making any decision in this regard, consult with a tax adviser.

Effect on 401(k)

A person who returns to work during retirement also will want to consider the effect on a 401(k). The 401(k), which offers tax-deferred growth of earnings, is an excellent vehicle for building retirement savings.

And now, thanks to a recent change in the law, active employees over the age of 70 1/2 no longer are required to take mandatory withdrawals from their current employer.

Employer match

That means the 401(k) can keep growing. If the worker is 70 1/2 or older, and does change jobs, he must take withdrawals from the previous employer's 401(k) plan. However, he may be able to contribute to the new employer's 401(k), and might even qualify for an employer match.

Keep in mind that most 401(k) plans don't fully vest employer contributions until after four or five years. So, if the worker leaves work before then, he may not collect the full amount of the employer's match.

Medical insurance

Another potential advantage of returning to work is the medical insurance the worker may receive from an employer. This will be especially relevant if he plans on retiring early, because Medicare doesn't begin to help with medical bills until age 65. And it's no secret that as we age, we incur greater health care expenses.

The worker who does return to work after retirement should be careful not to go overboard. For example, he may want to fulfill a lifelong dream by starting his own business.

Cashing out

To fund the new enterprise, he might consider cashing out his retirement plans. But if the business fails, he won't just lose a lot of money he'll lose the financial security he worked for his whole life.

So it's best to make plans carefully, consult with tax and financial professionals, and then, if it's appropriate to the situation, say "hello" again to the world of work.

(Betty J. Neal, CFP, is an investment representative with Edward Jones in Springfield.)