THE DOWNSIDE OF EARNING INCOME IN RETIREMENT

If you plan to earn income after retiring, you need to look carefully at the net effect of your earnings on your overall tax bill and plan your income to minimize any adverse effect. In addition to the graduated schedule of federal and state income taxes, consider the effect of earnings on Social Security benefits and the cost of self-employment tax. 

Earned income may affect your eligibility for Social Security benefits. If you are at full retirement age or older, there is no earnings limitation. But, if you retire before reaching full retirement age, your benefits are reduced when your annual earned income exceeds the appropriate limit. 

If you are self employed, you must also pay self-employment tax. This is the equivalent of F.I.C.A. withholding paid by you and your employer when you work for someone else. In 2005 this tax was calculated at 15.3 percent of net income up to 90,000 plus 2.9 percent of net income above that amount. When you calculate net profit, half of the tax is deducted as a business expense. 

Before moving to the next section, think about which of the four plans would enrich your retirement years the most. It is a decision you can always change or modify. But, the sooner you feel committed to one plan, the sooner you will feel comfortable with retirement. To help in this decision, compare your scores on all four preference scales. 

Score on Full-Time Work Preference Scale 

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