By Randy Neumann
Recently, a client came in to discuss a retirement idea. Someone told him that, although he is still working, he is eligible to collect his Social Security retirement benefits. He said, “I’ve been making money for my employers all of my life, now I’d like to do something for myself.”
First a little background. Today, this situation is not unusual. Economic conditions have caused many baby boomers (the first wave turned 65 this year) to change their retirement strategies. Some are delaying retirement. Others are planning to work after retirement, or interrupting their retirement to take a job or start a business. For many, the question becomes whether they can work and still collect Social Security, and what happens if they do.
Social Security was created in 1935. Sixty-five years later, Bill Clinton signed the Senior Citizen’s Freedom to Work Act of 2000. This was a great piece of legislation. Times were quite different then: 2000 was the ninth consecutive year of economic growth. The unemployment rate was at 4%, its lowest level in more than three decades, and the overall poverty rate dropped to its lowest level since 1979.
With unemployment at a paltry 4%, compared to the present 9+%, businesses were desperately searching for workers. Somebody in Congress had a brilliant idea. Why not encourage seniors to go back to the workplace by removing the penalties for working while collecting Social Security.
Many seniors were happy to get back into the workforce, and many employers were happy to have them. They did not need to learn new skills – they already had them. And, without fear of being called an “ageist,” ditto for their work ethic.
Getting back to my client’s situation. We went online to the SSA.gov website and entered his information. He was born in 1945, which makes him 66-years-old. Bingo! That is his full retirement age; therefore, he is entitled to $1,833 per month which is $21,996 per year.
Continuing the conversation I asked,” Does your company have a 401(k) plan?” The answer was, “Yes, and they match 3 percent if you put in 6 percent.” I reached into the conference room cabinet and pulled out a one-page tax summary. The maximum dollar contribution for 2011, for someone over the age of 50, is $22,000 which is four dollars more than his SS income. I said to my client, “I think someone is telling us something.”
I hypothesized, “Your salary is approximately $100,000 per year. You can collect $21,996 from Social Security without any penalties; therefore, your taxable income would be $121,996. However, only 85% of your Social Security benefits are taxable, so your taxable income is really $118,696.”
But wait a minute, he can contribute $22,000 to his 401(k) plan and get a deduction for the contribution. So, basically, he can sock away his Social Security payments into a retirement plan that will grow tax-deferred until he begins taking withdrawals.
And, let’s not forget about the company match of 3% which is $660. This does not come out of my client’s pocket; instead, it comes from the employer, but it goes into his account. So his annual contribution is $22,660. If he were to do this for five years, assuming a 6 percent return on the portfolio, the value of the account would be $158,060.
There’s one more wrinkle to this story. My client, like everyone else, must take Required Minimum Distributions from all of his qualified plans at age 70 1/2, except for one – his 401(k). A provision of the RMD rules say that if you are still working after age 70 1/2, and do not own more than 5% of the company, you are not required to take RMDs from the company retirement plan. You may continue making contributions and deferring the earnings in the plan until April 1 of the calendar year following the year in which you retire.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for the individual. Randy Neumann CFP® is a registered representative with securities and insurance offered through LPL Financial. Member FINRA/SIPC. He can be reached at 600 East Crescent Avenue, Upper Saddle River, 201-291-9000.