Does remaining in the workforce while receiving Social Security seem like a good retirement plan? This is the reality for an increasing number of people; nearly 20% of people 65 and older work full or part-time, which is up 50% from 2000.
Combining wages from work and Social Security benefits in one budget has a lot of positive aspects, including making retirement more comfortable. Social Security benefits, which average just $1,461 per month, are only intended to cover one-third of the income retirees will need to live on, according to the Social Security Administration (SSA). This shortfall means most retirees will need income from either a personal nest egg of retirement savings or earnings from a job.
Income from working can be allocated to specific goals, like travel or reducing debt in early retirement. Work can also provide retirees with a sense of purpose and engagement.
But the SSA has a number of rules regarding the amount of Social Security benefits you can receive while you're still working. If you're not aware of these three rules, you might be in for a rude shock if your work earnings end up reducing your Social Security benefits.
1. There's an income limit if you work before your full retirement age (FRA)
If you're planning to work and draw Social Security benefits, there's an income limit on what you can earn if you take Social Security before reaching your full retirement age (FRA), which is determined by your birth year. If you were born between 1943 and 1954, your FRA is 66 and then it rises in monthly increments between 1955 and 1959. FRA is 67 for people born in 1960 and after.
Americans become eligible for Social Security benefits at age 62, but benefits are reduced by claiming this early instead of waiting to start claiming benefits at your FRA.
The limit on what you can earn from work while taking Social Security before your FRA is called the earnings threshold and it is $1,470 per month for 2019, or $17,640 per year. The SSA adjusts the earnings threshold based on inflation every year; in 2018, it was $1,420 per month, or $17,040 per year.
Once you reach your FRA, income limits stop and you can work without any restrictions on your Social Security benefits. In other words, if your FRA is 66, and you turn 66 on July 15, 2020, you will be subject to income limits until June 30, 2020. Once July 1, 2020 comes, though, you can earn without any reduction in Social Security benefits.
2. The SSA withholds benefits if you earn above the income limit
If your earnings are over the income limit, the SSA will withhold money from your Social Security benefits. For 2019, $1 in Social Security benefits is withheld for every $2 in earned income that exceeds the earnings threshold, as long as you have not yet reached FRA.
But if you are in the year in which you will reach FRA, withholding is much less. First, the amount withheld drops to $1 of Social Security benefits for every $3 in earned income over the limit. And even better, the amount of income not subject to limits rises significantly. If you reach FRA in 2019, it will climb to $3,910 per month, or $46,920. The figures were $3,780 monthly and $45,360 annually last year.
The easiest way to gauge the net effect of these withholdings is by looking at some examples.
Say you're 65 and you will hit FRA in 2020. Currently, you receive $2,000 in Social Security benefits per month, or $24,000 annually. You also have a job that pays $2,500 per month, or $30,000 every year. Your earned income is thus $1,030 over the income threshold ($1,470) every month. As a result, the SSA will withhold $1.00 for every $2.00 it's over, or $515, from your benefits every month resulting in a monthly check for $1,485 in Social Security benefits, rather than $2,000.
But the picture is different for folks who'll reach FRA this year. Now, consider: You're 66 and will hit your FRA in 2019, your Social Security benefits are $2,500 per month, and you earn $4,000 per month. First, because the income limits rise in the year of FRA, you'll only exceed the income limit by $90 per month. At the same time, the withheld amount decreases to $1.00 for every $3.00 of earned income rather than $2.00. So just $30 will be withheld from your benefits. Your benefits will be $2,470 until your birthday month, and then voila! They will jump back up to $2,500 as benefit withholding stops when you reach your FRA.
If you're worried that any withheld money disappears forever, fear not. Once you reach FRA, the SSA recalculates your monthly benefit, giving you the new amount each month. It increases your monthly benefits, in a formulation intended to replace any withheld Social Security benefits over your lifetime.
3. Your Social Security benefits may be taxed
The third factor to keep in mind if you plan to work while drawing Social Security is that you may end up paying taxes on your benefits, depending on your combined income. The Internal Revenue Service defines combined income for this purpose as the sum of your adjusted gross income (AGI), any nontaxable interest, and 50% of your Social Security benefits.
If you're a single filer and your combined income is in a range of $25,000 to $34,000, you may owe tax on as much as 50% of your benefits. If your combined income exceeds $34,000, you may owe tax on up to 85% of your benefits. If you're married and filing jointly, and your combined income is $32,000 to $44,000, you could owe taxes on up to 50% of your Social Security benefits. If your combined income is more than $44,000, you may be taxed on up to 85% of your benefits.
Making the right choice about when to start taking Social Security benefits is crucial if you plan to work into your later years. It could cost you dearly.