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Need to Come Out of Retirement? Here's How It Affects Your Social Security Benefits

By Catherine Brock - May 5, 2020 at 8:10AM

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Going back to work may solve your savings shortfall -- just make sure you don't inadvertently cause a reduction in your Social Security benefits.

Rapper Lil Wayne said, "The more time you spend contemplating what you should have done ... you lose valuable time planning what you can and will do." If the stock market volatility this year has you second-guessing how much you saved for retirement, redirect your focus to the future and strategies to make your money last. Once the economy opens up again, returning to work may be at the top of your list.

You wouldn't be the only one to take that route, either. In May 2017, the Bureau of Labor Statistics predicted that by 2024, there will be 13 million people in the workforce ages 65 and older. A year earlier, the Federal Reserve Board found that more than 33% of retired men later returned to work. Given that Americans were generally underfunded for retirement before this year's bout of stock market turbulence, more seniors will need to extend or revive their careers to remain solvent long term.

Older couple budgeting.

Image Source: Getty Images

Before you start dusting off that resume, consider how a career restart impacts your Social Security benefits. Here are three approaches you can take:

You can withdraw your application

You do have the option to withdraw your Social Security application within 12 months of your initial filing. There's a big caveat here, though. You'll have to repay all benefits you received, including Medicare premiums, voluntary tax withholdings, and garnishments. And, if your spouse or kids collected based on your earnings record, they'll have to repay their benefits, too.

You can suspend your benefits

If you used your Social Security benefits to pay your bills and buy food, repayment isn't realistic. Alternatively, if you qualify, you could suspend your benefits once you start earning a paycheck again. To request a suspension, you have to be at full retirement age (FRA), but not yet 70. Your FRA is based on your birth year; you can check yours on the Social Security website.

The suspension process is fairly informal, too. You can call to request a hold on your payments. Because Social Security benefits are paid out the month after they are due, you'll get one more payment after your request. But from then on, your benefits will be suspended until you turn 70 or until you request a reinstatement -- which you can also do over the phone. Your spouse and children cannot collect benefits on your earnings record while your benefit payments are on hold.

You will earn delayed retirement credits when you suspend your benefits. That means your benefit amount increases for every month of the suspension. Assuming you were born after 1943, your payment will go up by two-thirds of 1% monthly or 8% annually. A benefit of $1,500 monthly, for example, increases by $10 for each month you have benefits suspended.

You can work and keep collecting Social Security

You could also simply work and keep collecting your Social Security benefits, though this may affect your benefit amount and your tax bill.

If you haven't reached FRA, you are subject to an income cap. When you earn more than the cap, your benefits are reduced using one of these two formulas:

  1. In the years before you reach FRA, your benefit goes down by $1 for every $2 you earn over the cap, which is $18,240 in 2020.
  2. In the year you reach FRA, your benefit goes down by $1 for every $3 you earn over a different cap, which is $48,600 in 2020.

Once you reach FRA, you can make as much as you like and it doesn't affect your benefit at all.

Your earnings from work may, however, increase your tax bill. You owe taxes on up to 85% of your Social Security benefits when your "combined income" is more than $34,000 for single filers or $44,000 for married filers. Combined income is your adjusted gross income, plus nontaxable interest, plus half of your Social Security income. If you're currently below these limits, wages from a new job may push you over the top, converting your Social Security benefits from nontaxable to taxable.

Plan your work, work your plan

Going back to work, if your health and the economy allow it, can be a good, short-term solution to pad your retirement savings. Just make sure you don't inadvertently incur benefit reductions or unexpected taxes. If you expect your income to be higher than what's allowed, and you haven't reached FRA, you can withdraw your claim and repay your benefits. After FRA, a benefits suspension is an easy option. Either approach will disrupt any benefits to your spouse or kids from your work record. If that's an issue, wait until you reach FRA and then return to work. You'll have to budget for any tax consequences that arise.

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