Reflections

How Working in Retirement Affects Social Security

For many retirees, retirement doesn’t mean stop working. Retirement can be the time to pursue a second career or a business idea you’ve always dreamed of. After all, it can be much easier to stay happy and healthy when actively engaged in meaningful, fun work.

If you choose to work in retirement, what impact does this have on your Social Security benefit? And what do you need to know today to make the most of your retirement income tomorrow?

There are two main points to know. First, working will reduce your benefit if you begin taking Social Security before your full retirement age. And second, there’s good news. If you earn more in your later years, it’s possible that continuing to work will increase your Social Security benefit. Also if you take a part-time job or work at a lower salary, there will be no reduction in your benefit.

A Social Security Benefit Review

Your Social Security benefit is based on your highest 35 years of earnings, up to a maximum annual earnings level ($118,500 in 2015).

To calculate your benefit, the Social Security Administration records your earnings history since the age of 16 and indexes these earnings up to today’s dollars, based on historic wage growth. Earnings after age 60 are treated at face value. The top 35 highest earning years (once indexed) are then averaged to find your “average indexed monthly earnings.” It is this number which is used to calculate your benefit. You’ll receive 90% of the first $826, 32% of the next $4,154, and 15% of anything remaining. The sum is your Primary Insurance Amount (PIA), which you will receive at full retirement age. You can see your estimated benefits and earnings record online here.

Work + Claim Early = Reduced Benefits

Your benefit will be greatly reduced by working if you’re drawing social security before your full retirement age. For those under full retirement age for the entire year, Social Security deducts $1 for every $2 you earn above $15,720 in 2016. The year you reach retirement age, this drops to $1 for every $3 you earn above $41,880, but earnings are only counted in the months before you reach your full retirement age. The benefits are not lost forever though. Once you reach full retirement age, your benefit would be adjusted to include the amounts that were previously withheld with an inflation adjustment.

Earnings counted toward the $15,720 threshold are a bit different than your taxable income. They count wages from a job and self-employment income, but pensions, annuities, investment income, interest, and government, veteran, or military benefits aren’t included.

Remember that if you file early, your benefit is already greatly reduced – for the rest of your life. Adding a reduction for income will reduce your benefit even further. So if you’re thinking of working and filing for Social Security early, see if you can make it on your earnings and savings alone.

If working and you’ve already filed for Social Security, there’s a chance you can change your mind. If you’re within 12 months of the time you filed the paperwork, you can reverse your decision – as long as you pay back the money.

How Working Can Increase Your Benefit

If you can wait to take your benefit past age 65, it’s possible that working will increase your benefit. After all, Social Security takes into account your 35 highest earning years. So if this year’s earnings are replacing a lower-earning year when you were flipping burgers, your benefit will re-calculate and increase. If you already have 35 high-earning years credited, the extra work will likely have no impact on your benefit (although it could affect how your Social Security benefits are taxed). You can use Social Security’s online retirement estimator to project your retirement benefits.

This scenario won’t just increase your own benefit – it can increase your spouse’s benefit too. Both spousal and survivor benefits are based upon your PIA, which again will be determined by your highest 35 years of earnings history.

It is unlikely that any benefit increase will be large enough to keep a weary near-retiree working longer. In the end, the wages from the earnings themselves will far outweigh any benefit received from Social Security. And if working keeps you from tapping into your retirement nest egg, even better. But if you want to work in retirement, know you might be rewarded with a higher Social Security benefit at the same time.

There are many reasons to work in retirement. But as you work, make sure to understand exactly how your benefit will change due to your working income. There’s a significant amount of money to gain – or lose – when taking your Social Security benefit.

Windgate does not provide tax advice. Consult your professional tax advisor for questions concerning your personal tax or financial situation.

Data here is obtained from what are considered reliable sources as of 12/31/2015; however, its accuracy, completeness, or reliability cannot be guaranteed.

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