Are you retired and thinking about going back to work? Are you planning for retirement but thinking that you may decide to start working again at some point?
You're not alone. An increasing number of retirees, having left the workforce, filed for Social Security benefits, and planned visits to their grandchildren, are returning to work.
The trend of retiring and returning to work is pronounced enough to have been given a name: unretirement. Roughly 26% of retired Americans later go back to work. Not only that, but almost 40% of workers aged 65 or older were retired at one point.
They're part of a growing wave of people who have hit retirement age and are still working. Nearly 19% of Americans 65 and older were employed either full-time or part-time in 2016, compared to just under 13% in 2000.
So if you've claimed your Social Security benefits and then started to consider unretiring, you're in good company. But don't make the decision without thinking long and hard about the effect of unretirement on those Social Security benefits, because your monthly checks may be reduced, depending on your age and your income.
Making a retirement decision
So when should you first decide to retire and claim Social Security if you think unretirement might be part of your life in the future? To understand the options, it's helpful to know Social Security's benefit structure. The amounts you receive depend on when you decide to retire and how old you are. It's a good idea to factor multiple Social Security benefit scenarios into your "when do I want to retire" calculations.
Eligibility begins at 62. Your benefits are reduced, however, if you choose to retire before your full retirement age, which depends on your birth year. For people born between 1943 and 1954, it's 66. It rises to 67 for people born in 1960 and after.
Social Security payments also rise approximately 8% for every year you delay benefits between your full retirement age and age 70, no matter what your full retirement age is. They also rise between 62 and your full retirement age, but by a smaller percentage.
Now, let's look at what happens to your Social Security benefits when you unretire.
Unretirement within 12 months of applying for Social Security
If you decide to unretire within 12 months of applying for Social Security benefits and you're under 70 years old, you can apply to withdraw your Social Security claim.
Just fill out a form and submit it to the Social Security Administration (SSA).
If you decide to go this route, the SSA requires you to repay all the benefits you and your dependents have received. You'll also need to repay any money withheld from the checks, such as Medicare premiums.
You can then reapply at a later time.
Unretirement before you reach full retirement age
If you're receiving Social Security benefits and working before you've reached your full retirement age, then the SSA may withhold a portion of your Social Security payments if your earnings exceed a certain threshold. For 2018, the earnings threshold is $17,040 ($1,420 per month). For every $2 you earn over that amount, Social Security will withhold $1 from your benefits.
So let's look at an example. Say you retired 12 months ago at the age of 64. Your full retirement age is 66. Right now, you receive $2,500 in Social Security benefits per month, or $30,000 annually. If you unretire and earn $3,000 per month, or $36,000 per year, the SSA will apply the earnings test. The $3,000 you earn is $1,580 over the monthly earnings threshold. Social Security will thus withhold $790 from your benefits, and your monthly check will become $1,710 each month.
The amount withheld changes in the year in which you will reach full retirement age. In January of that year, the SSA begins withholding $1 for every $3 you earn over the limit. So if you continue to work and earn $3,000 per month, the SSA will withhold $527 from your benefits in that year, rather than $790. Your monthly benefit will rise to $1,973.
Once you reach full retirement age, you'll no longer have to worry about any benefit withholding, even if you work while drawing Social Security payments. Withholding ends once you hit full retirement age.
Fortunately, the amounts withheld don't vanish into a black hole. Upon your full retirement age, the SSA will redo its calculations of your monthly benefit. You'll receive an increase in your monthly checks, designed to replace the withheld benefits over the course of your lifetime.
Be sure to factor in Social Security benefit taxes when planning unretirement, too. Benefit taxes are determined based on your combined income, which is the sum of your adjusted gross income (AGI), any nontaxable interest, and 50% of your Social Security benefits.
If you're married filing jointly with combined income of $44,000 or more, or if you're a single filer with combined income of $34,000 or more, then up to 85% of your Social Security benefit is taxable. Up to 50% of your Social Security benefit is taxable if your combined income is below those amounts but higher than $32,000 or $25,000, respectively, for joint filers and singles.
Unretirement once you've reached full retirement age
What happens to your Social Security benefit if you unretire once you've reached full retirement age?
Nothing! You're free to draw your Social Security benefits and work as much as you want. There is no earnings test once you hit full retirement age.