Q. I’m 66 and earning $124,000 a year from my job. I still have some substantial debt. I plan to move to a job that will pay $150,000 and either start my pension at $1,900 a month or cash out my state retirement account to pay off all debt. I can also get $2,400 per month from Social Security now. I would work five more years. What do you think?
— Seeing the light
A. We’re glad you’re asking before you tap your pension or Social Security.
Planning for and during retirement is a complex exercise and you will need to consider a number of scenarios based on your unique situation, tax laws, Social Security rules, the terms of your pension, how much debt you have and more.
Depending on your age, your Social Security income could be reduced if you make over a certain amount, said Deva Panambur, a fee-only planner with Sarsi, LLC in West New York and an adjunct professor of personal finance at Montclair State University.
He said for 2020, if you are under full retirement age for the entire year, $1 in Social Security benefits will be reduced for every $2 you earn over $18,240. If you reached full retirement age in 2020, $1 will be deducted for every $3 you earn over $48,600, he said.
“If you receive Social Security benefits for a portion of the year, and your earnings are over the limit for the entire year, there is a special rule that applies which would allow you to get full Social Security payments for any whole month you are retired if you meet certain conditions,” he said.
Starting with the month you reach full retirement age, your earnings no longer reduce your benefits, no matter how much you earn, Panambur said.
The full retirement age for those born in 1954 and later is between 66 years and 67 years. To calculate your earnings, the Social Security Administration only considers the amount you make from your job, including self-employment income. Pensions, annuities, investment income, interest, veterans or other government or military retirement benefits are not counted, her said.
Additionally, if you have substantial income — any and all income that must be reported on your tax return — other than your Social Security income, up to 85% of your Social Security income will be taxable, he said.
“If after your analysis, you change your mind about starting your benefits, you may be able to cancel your application for up to 12 months after you became entitled for retirement benefits and pay back all the benefits received,” he said. “This will allow you to restart your Social Security payment at an opportune time.”
State retirement plans have their own set of rules, so you will need to check how your decision to go back to work will affect your benefits.
“The decision to take a lump sum or monthly payment is another complex area, and you will have to consider several factors such as the solvency of the employer, terms of the pension options, your cash flow situation and your risk tolerance,” he said. “If you plan on paying off your debt using the lump sum you will also have to consider the terms of the debt such as interest rates, maturity and more.”
And don’t forget any taxes that may be owed on the pension.
You did not mention health insurance and whether you have already applied for and are receiving Medicare coverage, but you will also need to evaluate how Medicare compares to any health insurance offered by your employer and how the two would be affected by your decision to work during retirement, Panambur said.
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