Many retirees choose to continue working even after they begin receiving Social Security benefits. Whether it's for additional income, staying active, or pursuing a passion, working during retirement is increasingly common. However, it's important to understand how earning an income while receiving Social Security can affect your benefits. In this article, we'll explore how working impacts your Social Security payments, the rules you need to know, and strategies for managing your income to maximize your benefits.
How Earnings Affect Social Security Benefits
If you decide to work while receiving Social Security benefits and you haven’t yet reached your Full Retirement Age (FRA), your benefits may be temporarily reduced based on your earnings. This reduction is due to the Social Security Administration’s (SSA) earnings test, which limits how much you can earn before your benefits are affected.
Earnings Limit: In 2024, if you are under FRA, you can earn up to $21,240 without any reduction in your benefits. For every $2 you earn over this limit, $1 will be withheld from your benefits. This reduction is temporary and only applies until you reach FRA.
Year You Reach FRA: In the year you reach FRA, the earnings limit increases significantly. In 2024, you can earn up to $56,520 before your benefits are reduced. During this year, for every $3 you earn over the limit, $1 will be withheld from your benefits until the month you reach FRA.
After Reaching FRA: Once you reach FRA, there is no earnings limit, and you can earn as much as you like without any reduction in your Social Security benefits. Additionally, the SSA will recalculate your benefits to account for any months in which benefits were withheld due to excess earnings, potentially increasing your monthly benefit.
Impact on Long-Term Benefits
Working while receiving Social Security can have positive long-term effects on your benefits, particularly if your current earnings are higher than the earnings in your past work record.
Recalculation of Benefits: Social Security benefits are calculated based on your highest 35 years of earnings. If your earnings from working in retirement replace lower-earning years in your record, the SSA will recalculate your benefit, potentially increasing your monthly payment.
Boosting Lifetime Benefits: Continuing to work and earn income can result in higher lifetime Social Security benefits, especially if you replace lower-earning years with higher earnings. This increase in benefits will continue for as long as you receive Social Security.
Tax Implications
While working in retirement can increase your Social Security benefits, it can also affect the taxation of those benefits. Social Security benefits are subject to federal income tax if your combined income exceeds certain thresholds.
Combined Income Calculation: Your combined income is calculated as your adjusted gross income (AGI) plus nontaxable interest plus half of your Social Security benefits. If your combined income exceeds $25,000 for individuals or $32,000 for married couples filing jointly, up to 85% of your Social Security benefits may be taxable.
Managing Tax Liability: To minimize the tax impact on your Social Security benefits, consider strategies like reducing your taxable income through retirement account withdrawals, utilizing Roth accounts, or delaying Social Security benefits until you have a lower income.
Strategies for Managing Work and Benefits
Balancing work and Social Security benefits requires careful planning. Here are some strategies to help you manage both effectively:
Plan Your Earnings: If you’re under FRA, try to keep your earnings below the annual limit to avoid a reduction in your benefits. If you expect to earn more, be prepared for temporary withholding of benefits.
Delay Social Security: If you’re earning a significant income and don’t need the additional Social Security benefits immediately, consider delaying your benefits. This will allow you to avoid the earnings test and increase your monthly benefit through Delayed Retirement Credits.
Maximize Spousal Benefits: If you’re married, consider how your earnings and Social Security benefits interact with your spouse’s benefits. Coordinating your claims can help you maximize household income.
Consider Partial Retirement: If you’re not ready to fully retire, consider transitioning to part-time work. This can provide additional income while reducing the risk of exceeding the earnings limit.
Conclusion
Working while receiving Social Security benefits can provide valuable income and keep you active in retirement, but it’s important to understand how your earnings can impact your benefits. By planning your earnings, considering the impact on taxes, and strategically managing your Social Security claims, you can make the most of both your work and your benefits.
If you’re considering working in retirement, schedule a consultation with one of our financial advisors to develop a personalized strategy that aligns with your goals and maximizes your Social Security benefits.