Wednesday, August 29, 2018

Saving Some of Your Part-Time Employment Income in Retirement for Later

In today’s relatively tight labor market, some employers have been looking to fill employment positions by hiring their retirees on a part-time basis.  The current low unemployment environment presents an opportunity for retirees who either need additional income or who may be disenchanted with full retirement to negotiate a potentially more rewarding and more balanced work relationship with their former employer on a less than full-time basis.  This opportunity was discussed in the New York Times article, “In a Tight Labor Market, Retirees Fill Gaps their Previous Employers Can’t” (subscription may apply). 

If you do go back to work on a part-time basis, you will need to determine how this new income affects your annual retirement spending budget.   As discussed in our post of May 25, 2016, “How Much of that Part-Time Income Can You Afford to Spend in Retirement?”, we recommend that you spread this additional income over your entire expected lifetime planning period (LPP) rather than simply spending it all in the year you earn it.  In that prior post, we included a fairly complicated numerical example of the calculations involved under the Actuarial Approach.  In this post, we are going with a simple example and a more visual approach to encourage you to save some of your part-time employment income for your later years in retirement.  Before you actually go back to work on a part-time or a full-time basis, however, you should familiarize yourself with the Social Security earnings limit rules to see if your Social Security benefit may be affected by your employment.

Hypothetical Employee Example

Let’s assume that Bill is a single 65-year old retiree with $500,000 in accumulated savings and an annual Social Security benefit of $20,000 per annum.  Bill has established a reserve of $25,000 for future unexpected expenses but no reserves for other non-recurring expenses such as long-term care or amounts to be left to his heirs.  Using the default assumptions and the ABC for single retiree workbook available on our website, Bill has determined his current year actuarial spending budget for recurring expenses to be $41,215 ($20,000 from Social Security plus $21,215 withdrawal from accumulated savings). 

Bill’s former employer has offered him a part-time position that will pay him about $1,000 per month after taxes.  Bill has decided that his retirement would be personally and financially enriched by going back to work with his former employer, and he understands that this amount of additional monthly income would not reduce his current Social Security benefit.  But, he wonders how this part-time employment income will affect his current year actuarial spending budget for recurring expenses.

Bill goes back to the ABC for Single Retiree workbook and enters income of $1,000 per month in cell E(10).  He then estimates that he will work in part-time employment for a period of 5 years (which he enters in cell H(10)) and his part-time income will increase with assumed inflation of 2% each year (which he enters in cell I(10)).  He sees that if he spreads the present value of his expected part-time income for the next 5 years of $57,736 over his lifetime planning period (LPP), his current year actuarial spending budget for recurring expenses will increase from $41,215 to $43,794 ($20,000 from Social Security plus $12,000 from part-time employment plus $11,794 withdrawal from accumulated savings).

By comparison, if Bill decides to simply spend the extra $12,000 in part-time income each year as he earns it in addition to his initially calculated actuarial spending budget and works for 5 years, his recurring real dollar (inflation-adjusted) annual spending budget in retirement is expected to be $53,215 ($41,215 + $12,000) for five years and then drop back down to $41,215 thereafter.  The expected spending patterns under these two alternative approaches (assuming all default assumptions are realized) are shown in the chart below.  If Bill had used either the 4% Rule or the IRS RMD approach to determine annual withdrawals from his accumulated savings and added the result to income from other sources (in this example, his Social Security and his part-time income) to determine his annual spending, the expected pattern of his spending would be similar (but not exactly the same) as the “spend part-time income as earned” line in the chart.  

(click to enlarge)


If your goal is to have relatively stable real dollar recurring spending in retirement, you should spread part-time income (or any income you expect to receive over a temporary period in retirement) over your expected lifetime planning period.  This is one of the many advantages of using the Actuarial Approach over adding income from other sources to results of a Strategic Withdrawal Plan (SWP) like the 4% Rule or the IRS RMD approach.  SWPs just don’t properly coordinate with the timing or amounts of income received from other sources. 

The Actuarial Approach helps you develop a Strategic Spending Plan (SSP) not a SWP.  Withdrawals from accumulated savings each year under the Actuarial Approach are equal the difference between the SSP for the year and income from other sources for that year.  In the example above, Bill’s withdrawal from accumulated savings under the Actuarial Approach for the current year would be $11,794, or about 2.4% of his accumulated savings.   By not withdrawing as much from his accumulated savings as initially calculated, Bill is effectively saving some of his part-time employment income (or accumulated savings) for later. 

Note that SWPs like the 4% Rule and IRS RMD approach are withdrawal strategies, not spending strategies.   For this, and other reasons, we believe the Actuarial Approach is superior to any SWP approach.