Your Money: Two important things to consider on retirement income

08/09/2014 8:50 PM

08/09/2014 8:51 PM

As you begin to ponder retirement, there are two large considerations to keep in mind. One revolves around continuing to work and what effect it could have on your Social Security benefits. The second is further into retirement but focuses on the required minimum distribution rules and its effect on your retirement investments.

If you need extra income during retirement or if you find that a retiree’s life is boring, you may want to consider working. However, be aware of the effect that working during retirement has on your Social Security benefits. The Social Security Administration gives you the opportunity to work and receive retirement benefits so long as your earnings do not exceed the annual earnings limit. This limit applies only if you are under normal retirement age, which is based on your year of birth.

In 2014, you can earn up to $15,480 if you have not yet reached normal retirement age without affecting your benefit. If you earn more, $1 in benefits will be withheld or paid back for every $2 you earn over that amount. However, a special limit applies during the year in which you reach normal retirement age (up to, but not including, the month you reach normal retirement age). In 2014, this limit is $41,400. If you earn more, $1 in benefits will be withheld or paid back for every $3 you earn over that amount. Once you reach your normal retirement age, you can earn as much as you want without affecting your Social Security retirement benefit.

It might seem like a good idea to always keep your earnings below the Social Security Administration’s limits. However, there may be times when you might want to consider taking a job where your earnings exceed those limits. While you are subject to withholding for your higher earnings, your overall income may be greater because of those same higher earnings. Furthermore, because you pay Social Security taxes when you work, Social Security reconfigures your benefits to take into account the extra earnings.

There is a special rule regarding the annual earnings limit during your first year of retirement. If you retire mid-year, you may find that you have already earned more than the annual earnings limit. The rule allows you to receive full Social Security benefits for any whole month that you are retired despite the fact that you exceed the annual earnings limit.

Example: Phillip, age 63, receives $1,000 in monthly Social Security benefits for a total of $12,000 per year. In 2014, Phillip takes a job that pays $27,480 per year, $12,000 over the annual earnings limit of $15,480. Social Security withholds $1 for every $2 that Phillip earns over the limit – or $6,000. Phillip still receives the difference – $6,000 – from Social Security. With his earnings and Social Security, he has a total income of $33,480.

Although he has lower monthly Social Security benefits, Phillip’s overall income is greater than it would be without the job because of his higher earnings.

If you are retired, you might still be enjoying the tax-deferred status of your investments held in retirement plans. However, if you have a traditional IRA or other pretax retirement accounts such as a 401k, you are required to begin taking required minimum distributions for the year in which you reach age 701/2. If you fail to take the minimum distribution, you are subject to a 50 percent penalty on the amount that should have been distributed. Required minimum distributions generally must be made from employer-sponsored retirement plans after age 70 1/2. However, if you retire from your employer after that age, you may be able to delay taking required minimum distributions from that employer’s plan until after you’ve retired.

Life is a journey; plan for it.

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