New refinement on Year 1 retirement strategy

So far—all of two months into this new Bumhood adventure—I’m doing so well at staying on budget and living within my apparently reduced means that I’m thinking next fall I should teach two sections instead of three.

The community colleges pay $2,400 per class. Six times $2,400 comes to $14,400. Contrary to predictions, Social Security did not raise its earnings limitation this year: it remains at $14,160. While I certainly can afford to sacrifice half of $240 for the privilege of earning slightly more than a sub-poverty wage, I can’t afford the way they expunge it from your pocketbook. As soon as SS find out that you’re over the limit, they take away an entire month’s payment. From that they withhold the amount they think you owe them. But they don’t give the rest back until the following January. So, that’s $1,000 that goes away for months, maybe as long as a year.

My net on one section is $2016. True, it’s twice as much as a thousand bucks, but prorated over four months, it’s only $504 a month.

Meanwhile, I have over $16,000 residing in savings now. Because I started with a $14,500 cushion and so far have not spent anything like as much as I expected, the “cushion” keeps accruing feathers. Every month, another chicken’s worth of feathers gets stuffed in there. In addition, The Copyeditor’s Desk has $2,000 remaining to pay out in “dividends.”

When SDXB said you don’t need anything like as much as you think to live well in retirement, he wasn’t kidding. At the moment I’m coming nowhere near using all the money I budgeted to survive. That will change in the summer, when utility bills rise into the stratosphere, but by then enough will have accrued from the monthly underruns to cover those extra costs. It’s amazing. The guy is right: money happens!

Standing down off one section in the fall presents several sterling advantages:

1. Bureaucratic hassle avoidance. Not having to deal with Social Security over an earnings limit violation is worth a great deal. After the endless fights and negotiations with ASU’s HR department, the shape-shifting COBRA monsters, and now Medigap insurance predators, I have developed a bureaucrat flinch reflex.

2. Reduction of taxable income. Of course, it’s not enough to drop me into the lowest tax bracket. However, as it develops, Medicare, Medigap, and COBRA premiums are regarded as tax-deductible medical expenses, as are my long-term care premiums! Those will add up to at least $3600 this year. That’s 13 percent of an income cobbled together with Social Security and five sections. And that will make those costs deductible, even if I do earn a small wage from the S-corporation this year.

3. Brief reprieve from freshman comp. Since I’ll be teaching one section of magazine feature writing next fall, taking on just two sections will leave me with only one section of composition to have to struggle through. If I’m lucky and the section is 102 instead of 101, then I’ll have only three papers to have to grade for that course.

4. Hugely reduced course load. The feature-writing course is an eight-week online section. The chair has already agreed to make one of the comp courses he expects me to teach next fall an eight-week session, so that at any given time I’ll only be teaching two sections. If he stands by that, then I could end up with one composition course in the first half of the semester and the feature-writing course in the second half.

Hot dang! This would get the dratted comp class out of the way in eight weeks. The feature-writing course is online, and so for the rest of the semester I wouldn’t have to go to campus at all. At 19 miles per gallon, that represents a nice little saving in gasoline. And it sure represents a pretty saving in workload.

While I enjoy meeting with the young people and watching them bounce around, freshman comp is a discouraging class to teach. Especially in the community college, a good portion of the students struggle with serious learning problems and ESL issues. There’s very little you can do to help them. Really, in one semester there’s nothing you can do to make up for the shortcomings of 13 years of third-rate education, and there’s nothing you can do to change the way a dyslexic young adult’s brain is wired. You can’t teach them in 16 weeks what they didn’t learn in 13 years of K-12 training. It’s frustrating, and in many students’ cases, it’s just downright sad. So…any time I can get out of a section, I’ll be happy to do it.

Now, this scheme has some significant disadvantages, too.

1. Summer bills will deflate the cushion by about $1,200. This amount would be recovered by October if I’m reaching three sections.  By the end of December, I would have plenty of cash to carry me over the winter break: barring a huge unexpected expense, around $4,800.

However, in reality that’s way  more than I need to survive for a month of unemployment. With one fewer section to teach, I’ll still be back in the black by the end of October. The amount accrued to make it through winter break would than be about $3,300, more than enough to get by when utility bills are low.

2. Boredom factor. Teaching two sections will not give me enough to occupy my time. I’ll have to come up with new things to do.

That may not be a bad thing. ;-)

3. Boss annoyance factor. The departmental chair thinks he has me for three sections this fall. He won’t like having to hustle up someone else to teach a section of composition on short notice. Given the precariousness of my position, I hesitate to annoy this guy or bring myself to his attention in any negative way.

I really can’t make this decision until I get my tax forms. When ASU was jacking us around with furloughs, I changed the number of exemptions on my withholding, as to retain enough income to  live on. I never changed them back. Then at the end of the year I changed the amount withheld for Arizona’s rip to the minimum amount, so as to avoid having any more money gouged out of RASL and my vacation pay than absolutely necessary. This means that instead of having a refund coming, I may have to pay taxes this year.

Tax Lawyer has the mountain of paper I shipped to her office. It’s an incredibly complicated mess. She said she expects to have the returns ready the middle of this week. So it will be several days before I know whether I’ll have to pony up a chunk of the cushion to the government. If a lot of that money goes away, obviously I can’t take a chance that there won’t be enough to support me through 2010.

The longer I delay telling the departmental chair that I won’t be teaching three sections in the fall, the larger the headache for him. Hence, the greater the Boss Annoyance Factor.

However, the community colleges are not the only places to find freelance teaching work. Because I’m experienced in developing online courses, the fact is I can teach for any college in the nation. With the extra time freed up by dumping that third section in the fall, I could hustle up some jobs in other states, which might pay better than the District does. In 2011 I’ll be allowed to earn as much as I can, and so it would be useful to find someplace that pays more than $2,400 per section. Someplace that’s not ASU: I could earn about $3,200 teaching there, but I really want to be done with ASU, now and forevermore.

Speaking of teaching…time’s a-wastin’. Gotta run!

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frugalscholar March 8, 2010 at 8:25 am

Isn’t health insurance entirely deductible for the self-employed? Wouldn’t that lower your income tremendously–perhaps even yielding a loss? Could that loss offset the “extra” income that will go over the income limit for social security?

Aside from this (which, in truth, I know nothing about), the “money happens” is great news.

funny March 8, 2010 at 8:29 am

@ frugalscholar: The way I understand it, your medical bills (and apparently health insurance is included??) have to total more than 4% of your gross income before you can deduct it. Mine will total about 10%, so it should be completely deductible.

Social Security’s earnings limit is based on gross income. Period. Not adjusted gross income. Every penny you earn, whether you ever see it in your checking account or not, counts as “income” for the earnings limit.

frugalscholar March 8, 2010 at 9:52 am

Funny–for the self-employed–i.e. those for whom health insurance is not pretax–health insurance is 100% deductible–off the top. It is taken off income. My understanding is that if you make $4000 (self-employed) and your ins is $3000, you pay tax on only $1000. So it might not count as gross income at all. Needless to say, check on this w/ your accountant.

You are thinking of the tax deduction–I think it’s over 7.5% for health care costs–that is available to all who itemize.

frugalscholar March 8, 2010 at 9:54 am

Also–as a part-time employee, can you invest w/ pretax income in a 403b or 457 or deferred comp. That wouldn’t count as gross income then. Would it? Again, check w/ your accountant!

funny March 8, 2010 at 3:22 pm

@ frugalscholar: But I’m not self-employed. For freelance purposes, I’m an employee of my S-corporation, which is a pass-through entity from which I draw a “reasonable” wage (per the IRS) and dividends.

In fact, I have no self-employed income at this time.

Where the college is concerned, my tax lawyer says I’m considered the District’s part-time employee. The district gets to have its cake & eat it, too: it carries adjuncts as employees and gets all the benefits of that, but it doesn’t pass any benefits along to the adjuncts–one of the benefits we don’t get is the ability to call ourselves self-employed and claim the associated tax breaks.

Dividend income is not counted as part of the income that’s limited by Social Security. What counts is money from which FICA and Medicare are withheld. that’s what makes the S-corporation work: it allows me to count a very limited amount of earnings from freelance work toward the earnings limitation and to take part or all of the rest of those earnings as dividends.

I generally itemize and always have, because I have so many sources of income and because some are fairly complex in nature. My taxes are not something I could even think of doing myself.

Susan March 8, 2010 at 6:12 pm

Funny – I agree with the previous writer – I am pretty sure you can contribute some money to a 403b or traditional IRA and reduce your income. We have a couple of employees who do that at my place of employment. As recommended, ask your accountant.

funny March 8, 2010 at 6:45 pm

@ Susan: Yes, but they’re employed. I’m not. And they’re earning a living wage. I’m not. Although I’m earning a little pittance from the community college, that quasi-contract job is NOT BENEFITS-ELIGIBLE. Thus I’m barred from plugging into the District’s 403(b) plan. Where the feds, the state, and the community college are concerned, I’m a part-time benefits-ineligible employee, not a self-employed person.

I specifically asked two Social Security CSRs over the phone and one in person: “Does $14,160 mean adjusted gross income?” “Do you mean after contributions to tax-deferred savings”? “Can we deduct medical costs from that”?

The answer was “no, no, no. We mean gross. Plain old gross.” They explicitly said there was no way out of it: It’s not after-tax, it’s not after mortgage deductions, it’s not after IRAs. It’s what you earn in a given year before you try to weasel out of declaring what you actually earned.

If your coworkers are collecting Social Security and earning a full salary, they probably are over the “retirement age” designated for their cohort. Until recently, this was 65. But for people born around 1945, it’s 66. And the younger you are, the older the “retirement age” is. If you elect to draw Social Security before your “retirement age,” you are restricted to a specific, limited earned amount–in 2009 and 2010, that amount is $14,160. If you exceed that amount, the excess amount is effectively taxed at a 50% rate: 50 cents of every dollar above the allowed amount is taken out of your Social Security benefit.

This would be tolerable if it were just a matter of saying, “OK, I earned $300 too much; here’s a check for $150.” But that’s not how it works. A Social Security CSR told me that as soon as you exceed the earnings limit, SS withholds a benefit check–more than one, if your excess earning exceeds the amount of a single benefit payment. SS figures out how much you owe and returns the remainder to you, but not until the following January.

Suppose, for example, in August you let SS know that teaching three sections in the fall semester will cause you to exceed the earnings limit by $240 (we are told that we are required to notify SS as soon as we become aware that we will exceed the limit). One ENTIRE month’s benefit payment–in my case, a net of something over a grand, the bulk of my month’s income–is withheld. Now several months pass, in which you’d bloody well better have a healthy contingency fund, unless you enjoy dining on cat food. Not until the following JANUARY do you get your withheld check back, minus half of the $240 overrun.

Fair? No. Terrifying? Yes. Aversive? Hell, yes!

After the approved “retirement age,” this restriction goes away. At that point you can earn as much as you want. What you put into an IRA or work-related retirement plan then becomes irrelevant, except as a tax shelter. After “retirement age,” what you earn has no bearing on how you collect your SS benefit. It’s irrelevant, anyway, even before then, because before “retirement age” what counts as “earned income” is your entire gross earned income, not your AGI.

frugalscholar March 8, 2010 at 9:06 pm

Accrding to p. 30 of IRS 1040 booklet, employees of an iS corp can take the self-employment health insurance deduction. That is a very valuable deduction. For health insurance premiums.

Healthcare COSTS are deductible via itemizing–

As far as I can tell, the purpose of an S corp is to avoid self-employment taxes on part of the income. I wonder if it might not be more beneficial to be a sole proprietor. The self-employed people of my acquaintance (contractors, mostly) pay little tax of any sort because almost everything they do is a business expense. Your insurance deduction might wipe out most of the income from the business.

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