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Semi–Retirement: The Third Alternative

What Does This Article Cover?
  • What is semi-retirement?
  • Why do people choose semi-retirement?
  • How does semi-retirement affect Social Security?

"The best part is the freedom. I don't have to be any place I don't want to be. But I'm still active and involved, and the extra money helps." — Cal Traver, semi-retired

Like millions of seniors today, Traver has chosen the third alternative of semi-retirement — a cross between full–time employment and full retirement. A former police officer, Traver is now in sales. Others may be two-day-a-week consultants; department store greeters; substitute teachers almost anything.

They work for several reasons:

  • They want to stay involved, especially if they are in good health. If you retire in your 60s, your retirement could span three decades or more. Between 30,000 and 50,000 people have already crossed the hundred-year mark. By 2050, America is expected to have more than 800,000 centenarians.1 "I work to keep active mentally and physically," says Traver, who retired after 28 years on the police force. "Working part-time offers social and psychological benefits."
  • They want the money either to make ends meet or to pay for extras such as travel for themselves or gifts for grandchildren. Most of all, for many people, part-time work takes the pressure off a too-small nest egg. Let's say you retire at age 65 and work part-time for the next 10 years, earning $20,000 a year. That puts an extra $200,000 (before taxes, of course) that you earned.

How can you make semi-retirement work for you, whether you are several decades away from retirement or already reserving a mid-week tee time on the golf course?

Do not view semi-retirement as a substitute for retirement savings. You never know how long you will be able to work or want to work. Make semi-retirement an option, not a must-work necessity. So, keep stockpiling money for your future while you work full-time. Specifically, you may want to consider:

  • If your employer provides a profit–sharing plan, consider making maximum contributions up to the day you retire.
  • Consider putting money into other qualified plans, such as IRAs. since growth is tax-deferred.
  • Consider annuities. These are long-term saving vehicles and withdrawal restrictions may apply. The money grows tax-deferred, with no upper limits on contribution amounts. You can shovel as much money as you can spare into your annuity.
  • Annuity withdrawals may be subject to a 10% IRA penalty. In addition, surrender charges may apply.
  • Consider contributing to a Roth IRA, if you qualify based on your Annual Gross Income. Contributions to a Roth IRA may generally be withdrawn tax-free at any time. Earnings may generally be withdrawn tax-free, if the account has been held for at least 5 years and the withdrawal is made after age 59½. If the withdrawal is made before the 5-year period or age 59½, income taxes and a 10% penalty tax may apply.
  • Withdrawals from a Traditional IRA may be subject to regualr income tax, and if made prior to age 59½, may be subject to a 10% IRA penalty.
The Pension Protection Act of 2006
  • The PPA makes permanent the increased regular and catch-up contribution limits for traditional and Roth IRAs which were enacted under the 2001 tax act (EGTRRA). Before the PPA, these changes were scheduled to expire after 2010.
  • The PPA makes permanent the Saver's Credit, which was scheduled to expire at the end of 2006.
  • The AGI limits on deductible traditional IRAs, deductible spousal IRAs, Roth IRAs, and the Saver's Credit will be adjusted for inflation, beginning in 2007.
  • The PPA allows IRA owners who are at least age 70 1/2 to exclude from income distributions of up to $100,000 per year which are transferred directly by the IRA issuer to a qualified charitable organization. This provision is only effective for 2006 and 2007.
  • Beginning in 2008, the PPA allows rollovers from a qualified retirement plan, 403(b) plan, or governmental 457 plan directly into a Roth IRA. Before the PPA, participants of such plans would have to first roll over the funds to a traditional IRA and then convert the traditional IRA into a Roth IRA./li>
  • Beginning in 2007, taxpayers can direct the IRS to directly deposit all or a portion of their tax refund into their IRA.

Research your work options. Many companies use retiring employees as independent contractors. Or you may want to check out something totally new. Find a position that you enjoy and that gives you the freedom to set your own hours, with enough time off to enjoy your retirement.

Caution: Research your options with Social Security. While you can begin taking Social Security as early as age 62, the longer you delay, the greater your benefits will be.

Plus, earnings from employment or self-employment can affect your benefits. For example, if you are under full retirement age and receiving Social Security benefits, any amount you earn above $12,960 (in 2007) will begin reducing your Social Security checks by $1 for every $2 you earn. In the year you reach full retirement age2, you can earn $34,440 before you begin losing benefits; and benefits are reduced $1 for every $3 earned. Beginning in the month you attain full retirement age, there is no earnings limitation.

Should you defer Social Security benefits? Factors include your own health, the age of your spouse, tax considerations, and more. No simple answer is applicable to everyone. Each person has to evaluate his or her own situation.

Semi–retirement is an increasingly attractive option for many Americans.

1 http://www.open-spaces.com/article-v3n3-kaye.php

265 and 6 months for those born in 1940; 65 and 8 months for those born in 1941, Source: ssa.gov

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This material is being provided for informational purposes only. Neither New York Life nor its agents provide legal, tax or accounting advice. Please contact your own advisers for legal, tax and accounting advice.

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