If you want to enhance your retirement lifestyle, or are not quite ready to retire fully, then you can still work and collect Social Security benefits. However, before starting a retirement job, make sure to crunch the numbers to see how your Social Security payments will be affected.
If you work while receiving these benefits before reaching full retirement age, be mindful that "the earnings test" may reduce or cancel the checks you were counting on. Working longer, even while collecting Social Security, can also impact how much money you ultimately receive in benefits during retirement.
A Recap of the Social Security Benefit
The Social Security Administration calculates benefits using a method that considers a person's income in their 35 highest-paying years (indexed for inflation). You are eligible to receive employee benefits at age 62, with full retirement age (FRA) ranging from 66 to 67 years old depending on when you were born. FRA is at 66 if you were born between 1943 and 1954. It then increases gradually by a couple of months if you were born from 1955-1959. If you were born in 1960 or later the FRA is 67. If you start collecting your benefits before the full retirement age, your benefit will be reduced across the lifetime of your retirement by 25% to 35% for each month before FRA. However, if you wait until age 70 to collect, you can earn an additional 8% in benefits for every year after the full retirement age.
The Retirement Earnings Test
This is a commonly misunderstood aspect of Social Security retirement benefits, though it has been a feature from the start. The earnings test applies to individuals who get money from employment while receiving Social Security before they reach full retirement age. Your Social Security payments will be temporarily lowered if you make over a certain amount of money. You will get those lost benefits back once you reach your FRA. What this means is that the benefits Social Security withholds from you before reaching FRA will be paid in full later on.
An additional consideration is that your 35 highest-paying years could be recalculated. Many people earn more later during their working-life than at the start. So, if your retirement earnings are more than previous income, continuing to work could be of benefit. The calculation is a rolling process. If you are earning and receiving Social Security and your latest yearly earnings replaces a lower-earning year, your benefit will be recalculated. But be mindful that higher earnings will affect your retirement earnings test, though ultimately you do get back any withheld Social Security payments.
There are no limits to how much you can make, and still collect social security payments, after reaching your FRA.
How Does the Retirement Earnings Test Work?
- Retirees who are more than one year away from FRA have a lower limit. In 2022, the lower limit was $19,560 per annum. For every $2 an individual earns above this amount, Social Security will withhold $1 from their benefit.
- If you are one year or less away from your FRA, there is a higher limit of $51,960 per annum. At this limit for every $3 earned over this amount, Social Security will withhold $1 from your benefit payment.
This means that you can earn up to $19,560 or $51,960 per year, depending on your age and FRA, before the earnings test comes into effect. If your income is above the limit, the Social Security Administration will reduce your benefits by either sending you fewer checks or lowering your monthly payment.
It is good to note that income is considered wages from an employer and does not include investment earnings, government benefits, interest, or capital gains.
The earnings test does however affect the spousal benefits. If you or your spouse is employed while collecting either type of benefits before FRA, both payments may be withheld. To learn more about Social Security and the Spousal Benefit, read our other recent post here.
The Retirement Earnings Calculation
If, for example, you decide to take Social Security benefits at age 63 (even though your FRA is 67), and in that year you make $45,000, which is $25,440 above the lower income limit, then Social Security would temporarily withhold $12,720. The calculation is: ($45,000 - $19,560)/2 = $12,720.
Retirement Earnings and the Impact on Tax
It is important to remember that any earned income (i.e., from working), withdrawals made from traditional IRAs or 401(k)s, as well as dividends and interest on investments, can contribute to making part of your Social Security payments taxable. A portion of your Social Security benefits may be taxed if the sum of your adjusted gross income, non-taxable interest, and half of your Social Security benefit is greater than $25,000 for an individual or $32,000 for a couple. If these sources of income are more than $34,000 ($44,000 for couples), up to 85% of your Social Security payment can be taxable. If you are considering rolling over your 401(k) to an IRA have a look at our article discussing the benefits and drawbacks of an early 401(k) rollover without paying taxes.
If you receive Social Security income while working:
- Your Social Security benefits might be temporarily reduced. This is a consideration if you were counting on the full Social Security benefit.
- When you reach full retirement age (FRA) you will receive the withheld amount. This could be a considerable pay-out if you can and want to keep working during early retirement.
- You might be eligible for a higher benefit later. If your income during your early retirement is more than in previous working years this may push up your highest-paying 35 years, increasing your Social Security benefit after FRA.
Social Security and Retirement Earnings can be complicated topics, but it is important to have a grasp of them before you retire. If you are in any doubt, get in touch with a fee only financial advisor. This way, you can be certain that you are getting the most out of your retirement savings.