If you work after you
‘retire,’ protect your
other income

IN earlier generations, "retirement" meant what it sounds like -- a cessation of working. Not any longer. Today, when people "retire" from one career, they may well launch into another, either as a consultant, a small-business owner or a part-timer. But if you're going to do some type of work after you retire, you'll want to make sure you're also protecting your other sources of retirement income.

Toward that goal, keep these points in mind:

» Earnings won't endanger Social Security payments.

Until a few years ago, you would have lost $1 in Social Security benefits for every $3 of earnings over an annual cap, assuming you were between 65 and 69. But, as a result of legislation passed in 2000, you can now earn as much as you want and still receive your complete Social Security benefits, provided you've reached "full" retirement age, which is based on your year of birth. However, your earnings could contribute to your Social Security benefits being taxed. Depending on your income level, as much as 85 percent of your benefits could be taxable.

» Working may lead to larger benefits.

If you keep working, and you don't really need to start collecting Social Security, you can build up larger benefits. You can continue increasing your benefits until age 70, at which point they "max out." However, by delaying taking Social Security, you will forfeit some years of payments, so you'll have to base your decision on a combination of financial need and your family history of longevity.

» Working could allow you to postpone 401(k) distributions.

Your 401(k) plan provides you with several key benefits -- especially tax deferral. Because you pay no taxes on your earnings until you start taking withdrawals (or "distributions"), your money will grow faster than it would if placed in an investment on which you paid taxes each year. So, by working after you officially retire, you may be able to afford to wait before taking 401(k) distributions, thereby maximizing the power of tax deferral. Or you could decide to roll over your 401(k) to an IRA, which offers more investment options.

In any case, there's a limit how long you can wait: Unless you are still working for the same employer, you must begin taking minimum 401(k) distributions by April 1 of the year following the year in which you reach age 70 1/2.

» By working, you may also be able to delay tapping into your traditional IRA, which also requires you to start taking distributions in the year after you turn 70 1/2. Or, if you don't need the income from your traditional IRA, you could convert it to a Roth IRA, which doesn't force you to take withdrawals by a certain age. And Roth IRA earnings grow totally tax free, provided you meet certain conditions. Before taking action, though, consult with your tax adviser; when you convert a traditional IRA to a Roth, you will pay taxes at your ordinary income tax rate on any pre-tax contributions, plus any gains.

If you choose to work after you retire -- or even if you need to work -- take the time to understand how your earnings will affect your financial situation. By making sure all the pieces fit together, you can solve the retirement income "puzzle."