It's becoming more and more common for older adults to continue working past the traditional retirement age. In fact, around 49% of baby boomers say they expect to keep working past age 70 or never retire at all, according to a 2023 report from the Transamerica Center for Retirement Studies.
If you file for Social Security and continue to work, it could affect your benefits. Your payments could be reduced by hundreds of dollars per month, and in some cases, they may be withheld altogether. Here's what you need to know.
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How working affects your Social Security
When you're receiving benefits while also earning income from a job, your wages are subject to something called the "retirement earnings test."
The earnings test is essentially an income limit that will determine how much, if any, of your benefits will be withheld due to your earnings. This limit changes from year to year to account for cost-of-living changes, and there are two different limits depending on your age.
First, you'll need to know your full retirement age (FRA). Your FRA depends on your birth year, but it's between ages 66 and 67 for everyone.
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If you won't be reaching your FRA in 2023, your earnings test limit is $21,240 per year. For every $2 you earn above that limit, your benefits will be reduced by $1.
If you will reach your FRA this year, your income is subject to a different limit of $56,520 per year. With this limit, your benefits will be reduced by $1 for every $3 you earn above the cap.
So, for example, say you're 65 years old with an FRA of 67, and you're earning $40,000 per year from your job. In this case, you won't reach your FRA this year, so you're subject to the $21,240 annual limit. Your income is $18,760 over that limit, so your benefits would be reduced by $9,380 per year -- or roughly $782 per month.
The good and bad news
The bad news about working while on Social Security is that, depending on your income, you could receive far less per month than expected.
Many older adults choose to continue working after taking Social Security for financial reasons. If your benefits are slashed by hundreds of dollars per month, that could make it even harder to make ends meet.
The good news, though, is that these reductions are only temporary. Your income is only subject to the earnings test in the years and months leading up to your FRA. Once you reach your FRA, the Social Security Administration will recalculate your benefit amount to account for the money that was withheld due to your income.
After your FRA, the earnings test will not apply. In other words, your benefits will not be reduced regardless of how much you're earning from your job.
Social Security can be confusing at times, and the earnings test limit is no exception. But if you're expecting to work after taking benefits, knowing how your income will affect your monthly payments can help you avoid any surprises in retirement.
