Make Sure Staying On Your Job Won't Undermine Your Pension Benefits

If you're looking to stay on your job for some extra income after retirement age, make sure that you're not financially shooting yourself in the foot. Here's what to be aware of...

Some defined-benefit pension plans compute your pensions benefit based on a set number of years of service. If your plan tops off at 30 years, but you decide to work another year, it may be that you're not going to get any additional pension benefit for doing so.

But it may be worse than that. In some cases, workers who stay past their prescribed retirement age risk lower their overall pension benefits. That's because some pension plans determine the benefit as a percentage of earnings during the last years of service. If you choose to work those excess years at reduced hours or lower earnings, you may actually reduce your pension benefits.

*Check with your pension administrator:

Be sure to check how working longer will affect your pension before signing on for another year. Often you may want to work at a lesser earning level, so check if that will be detrimental to your final pension benefit.

Remember that a defined benefit pension generally pays out as a life annuity. It stops if you die except for any provisions it has for a surviving spouse. So, unless working longer - beyond normal retirement age - significantly adds to your pension benefit, you'll want to begin collecting it when it's normally due to be paid.

*Switch to another job to maintain your benefits:

If it turns out that staying with your company will lower your pension benefits, consider moving to another job after you max out your years of service. That way you can collect your pension from your first company unaffected by whatever income you feel comfortable with at another company.

*Know how working income affects your marginal tax bracket or taxes your Social Security:

Collecting a pension while working can give you more income than you're used to. Both pension and working income directly add to your taxable income. So find out what amount of working income on top of your pension push you into higher marginal tax brackets.

If you have a defined contribution plan, you can hold off on distributing it to yourself. You can keep contributing to some - like your 401(k) - for as long as you have working income. But you must begin your minimum required distributions of your IRAs after you turn 701/2.

When you begin receiving Social Security, you'll want to see at what level of working income your Social Security begins to be taxed. Knowing this may make you hold off on starting benefits or hold off on working too much.