Sometimes work doesn’t really pay. The sad fact is that older Americans have to analyze this issue carefully before taking a job. While the situation improved after 1997 and 2000 law changes, if you are receiving Social Security benefits returning to paid employment actually could cost you money. I regularly hear from subscribers whose marginal tax rates for each additional dollar earned are 90% or higher. The penalties for working are highest in states with high income tax rates, such as New York and California.
If you are considering working in retirement, here’s how to determine how much cash you’ll net from a job.
For starters, determine how much of what you earn you’ll actually get to keep.
You’ll pay the regular income taxes on your wages – federal income taxes and perhaps state income taxes. There also will be Social Security and Medicaid taxes amounting to 7.65% of your salary. In the 27% federal tax bracket with a 5% state income tax, almost 40% of your new income will go to taxes. This bracket tops out with taxable income of $60,550 in 2002.
WORKING IN RETIREMENT WORKSHEET
– FEDERAL INCOME TAXES __________
– STATE INCOME TAXES __________
– PAYROLL TAXES __________
= NET SALARY AFTER TAXES __________
– COMMUTING EXPENSES __________
– MEALS, CLOTHES &
OTHER JOB COSTS __________
– LOST SS BENEFITS __________
– ADDT’L TAXES ON SS BENEFITS __________
= NET CASH FROM JOBRW __________
That might be just the beginning. If you are receiving Social Security benefits, there might be two more moths eating holes in your paycheck.
As of January 2000, the limit on “outside” earnings for those receiving Social Security benefits was eliminated for those ages 65 through 69. There never was a limit for those over 69.
There still are limits, however, for those aged 62 through 64 who are receiving benefits and also for the year in which you turn age 65.
For those 62 through 64, one dollar in benefits will be lost for every two dollars of employment earnings above the limit. The limit for 2002 is $11,280 or $940 per month. For example, if you are 63, receive Social Security benefits, and earn $20,000 from a job, you’ll lose $4,360 in benefits. Each dollar you earn above $11,280 costs you fifty cents in benefits.
In the year you reach 65, your benefits are reduced for excess earnings in the months before the 65th birthday. The limit is $2,500 per month or $30,000 annually. You lose one dollar in benefits for every three dollars of earnings above the limit. Once you hit age 65, there is no limit on your earnings.
The second hole in your paycheck is the amount of your benefits that will be hit with income taxes. When you are married filing jointly, up to 50% of benefits are taxed when adjusted gross income (including tax-exempt interest) exceeds $32,000. And if your adjusted gross income exceeds $44,000, up to 85% of benefits could be taxed. (The thresholds for single taxpayers are $25,000 and $34,000 respectively.)
Calculating the amount of Social Security benefits that might be taxed is complicated and you need to use the worksheets in the IRS instructions. But if your adjusted gross income is above those amounts, you can be sure that some of your benefits will be taxed.
Now that you have an estimate of your net income from going back to work, don’t forget that some expenses might rise. Though “casual dress days” are widespread, you probably can’t go to work every day in golf or gardening clothes. You also might incur commuting and parking costs and be more likely to eat lunches out.
Your regular household expenses also might increase. There might be less time to cook, clean the house, and take care of the yard. That might mean paying more for those services. All these expenses can add up. (On the other hand, you might spend less on golfing and other costly leisure activities to offset to some of these higher expenses.)
Everyone will have different experiences with these costs, so you have to analyze your own situation.
Let’s look at an example of how much it can cost a retiree to work.
Suppose Max and Rosie Profits are both age 63 and each receives annually $8,000 in Social Security benefits. They also receive $12,000 in interest and $12,000 in dividends, giving them cash income of $40,000. Max takes a job paying $20,000 annually. He estimates clothing and transportation each will cost him an additional $1,000 for the year, or $2,000 total. He also figures that he’ll spend an additional $750 on restaurant meals because of the job.
Now the government steps in. Max’s salary will incur federal income taxes of about $5,400, state income taxes of about $1,700, and payroll taxes of over $1,500. My estimate is that none of their Social Security benefits were taxed before Max took the job, but $6,000 will be taxed after he takes the job. They also move from the 15% bracket to the 27% bracket.
The Profits will lose $4,360 of Max’s Social Security benefits because he is earning more than $11,280. Unfortunately, it is the pre-tax and not the after-tax earnings that are used to calculate this penalty.
The bottom line I estimate is that Max’s $20,000 job nets between $5,000 and $6,000 in additional cash after all taxes and job-related costs are subtracted.
I’ve prepared the worksheet to help you work through this question. Of course, this analysis covers only the financial aspects of taking a job. There are intangible benefits, such as the sense of purpose and social interaction. But after looking at the tangible benefits of working, if Max doesn’t need the cash he might reconsider. He might find that volunteer activities would be just as satisfying and almost as profitable. Of course, if Max anticipates keeping the job after he turns 65, the job would become much more profitable because he no longer would lose Social Security benefits.