Retirement has become a foreign concept for a growing number of Americans.
According to a recent survey commissioned by the Federal Reserve, more than half of respondents aged 60 years or older said they plan to work in retirement.
Meanwhile, a separate study by the Government Accountability Office found that "62 remains the most prevalent age to claim Social Security benefits." In other words, the majority of Americans are taking Social Security benefits as early as possible.
If you've read much about Social Security, you know that these two points are potentially in conflict. Specifically, if you claim benefits at age 62 but continue working, your benefits could be reduced as a result of your earnings.
Here's how this works: If you earn more than $15,480 per year after claiming Social Security but before reaching your full retirement age, which is currently 66, then your annual benefits will be reduced by $1 for every $2 earned above the threshold.
Let's say, for example, that you're 63 years old and earn $20,000 working part-time. In this case, the Social Security Administration would deduct $2,260 from your annual benefits -- that's half the difference between $20,000 and $15,480.
Just to be clear, that $2,260 wouldn't be deducted evenly over 12 months by reducing each check by $188. Instead, all monthly checks are withheld starting at the beginning of each year until the deduction amount is satisfied.
To get a better feel for how this works, here's an example from the SSA's pamphlet "How Work Affects Your Benefits":
Let us say that you file for Social Security benefits at age 62 in January 2014 and your payment will be $600 per month ($7,200 for the year). During 2014, you plan to work and earn $20,800 ($5,320 above the $15,480 limit). We would withhold $2,660 of your Social Security benefits ($1 for every $2 you earn over the limit).
To do this, we would withhold all benefit payments from January 2014 through May 2014. Beginning in June 2014, you would receive your $600 benefit and this amount would be paid to you each month for the remainder of the year. In 2015, we would pay you the additional $340 we withheld in May 2014.
While having benefits withheld may seem harsh, it isn't as bad as it looks.
Once you reach full retirement, your earnings no longer count against your benefits. You get all of your benefit checks regardless of income.
Additionally, upon reaching full retirement, your benefits for the remainder of your life are adjusted to offset the amount previously withheld. For instance, if checks were withheld for 15 months, then those months would be added to your retirement age for the purpose of recalculating your benefits. Click here to learn more about how Social Security benefits are calculated.
This is little solace, of course, to anyone who must continue working in retirement. But it could help cushion the financial blow from the decision to do so.
