7 steps to a successful 'unretirement'

By Ginger Applegarth

Hockey superstar Mario Lemieux did it. Frank Sinatra did it more than once, and of course, did it his way. Bad and maybe not-so-bad 70's rock bands do it all the time.

Which is going back to work after retirement.

When famous hockey players and entertainers make a comeback, it's front-page news. But 'unretirement' isn't unusual anymore, and unretiring may become part of your own retirement plan.

If you're thinking of going back to work after retiring, you aren't alone; 25% of current retirees have gone back to work. These numbers will grow as baby boomers age. In fact, one Rutgers University survey suggests that 90% of working adults plan to work part time after they retire.

But the decision to go back to work is not as straightforward as it sounds, and it doesn't always make you richer or happier. There are many factors to consider before you jump back in the workforce, including:

Cold, hard cash

Money. Money is obviously a major reason for unretiring -- we're living longer; we expect to do more in retirement than sit on the front porch; fewer of us are covered by company pension plans; and we know not to count on Social Security for all our needs. Even if we planned well, we may have less than we thought we would because we were forced into retirement to start with. In fact, 40% of current retirees had planned to work much longer than they did but were downsized or given early retirement packages. Retiring even two or three years earlier than planned can make the difference between having enough for retirement or not.

It's not just about the money. But the big surprise is that unretiring isn't just about money. In that same Rutgers University survey, almost 70% of working adults say they'll work even if they have enough money to live on for the rest of their lives. That's a good indication of how much more we get from work besides a paycheck -- intellectual challenge, companionship, even office gossip, as well as the satisfaction of doing a job and doing it well.

The timing may be right. If you are thinking of unretiring, you've picked a good time to do so. The economy is picking up, unemployment is relatively low, companies need experienced and loyal employees, age discrimination is lessening and you're probably a bargain (especially if you work part time and don't need all those expensive employee benefits).

Ask yourself…

But deciding to go back to work after retirement isn't a financial no-brainer. In fact, you don't always end up with lots of extra money in your pocket. Before you commit to going back to work, here are some important questions to ask and some things you need to do:

How much do you need? Figure out how much money you need to make, after taxes and expenses, to make going back to work worthwhile. Don't forget all those work-related expenses (lunches, commuting costs, clothing and the like) that are missing from your budget now. Your earned income will be added to your current income (Social Security, pension plans, interest and dividends, etc.), and you may end up in a higher tax bracket. The Tax Planning section at MSN Money can help you. Our Retirement Income and Expense calculators can help you as well. When you're done with your analysis, you might decide that the higher tax bracket makes going back to work unprofitable.

Will you get hit with the Social Security penalty? There was lots of press when Congress repealed the income tax penalty for some retirees who work and receive Social Security retirement benefits at the same time. But that penalty wasn't repealed for all retirees. After a close look, you might decide that waiting until you turn 65 makes more sense than paying the penalty.

Are you working full time now and plan to switch to part time, not total retirement? If this is the case, and you are participating in your company 401(k) plan, don't take a distribution from your 401(k) plan now. The IRS recently issued an Information Letter stating that the employer-employee relationship must be completely severed for the distribution to qualify for the special tax treatment that retirement distributions receive. If you don't follow the rules, you could be hit with a penalty, in addition to the income taxes you would otherwise pay. You might decide to defer the distribution, or quit outright and become an independent contractor, or go back to work part-time six months later.

Are you nearing age 70 1/2? Let's say you're working at your old job at age 70 ½. You can defer mandatory distributions from your company's 401(k) plan, and you can still make contributions to it. (This is one reason people unretire, to defer taking those distributions.) However, receiving a paycheck doesn't let you defer distributions from an IRA you might have set up separately outside your job. You must start taking those mandatory IRA distributions at age 70 1/2, even if you are working.

Can you be part of your unretiring employer's retirement plan? Find out if you will be eligible, and check out the waiting period and the vesting schedule. Put in every dollar you can as soon as you can, and open an IRA if you are eligible.

Do you plan to start a business? If you do, do NOT bet your current retirement money on future success. Leave the cash in your retirement plans alone. To finance your new venture, get help from the Small Business Administration. You might decide after doing a business plan that you're better off working for someone else.

Why do you plan to work? Think about all the financial and nonfinancial reasons you are going to go back to work. Be realistic about your unretirement job. You probably won't have as much responsibility and power as you did during your regular career, especially if you work part time. You might decide that you would enjoy not having so much responsibility and being able to leave the job at the office.

Unretiring is a major life decision, and you need to know how it will affect your finances. If you answer these questions, and decide it's just not worth it financially, think about volunteering. Two good places to check out volunteer possibilities are Idealist.org a site that offers links and information about getting involved with nonprofit organizations, and at AARP, the former American Association of Retired Persons.