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Will Working in Retirement Affect Your Social Security Benefits?

Everyone’s retirement journey is different. For some, working becomes a significant addition to their personal and financial lives. 

But working in retirement doesn’t just bring added income and a full social calendar, it could also impact other areas of your financial plan like your tax liability as well as your Social Security benefits. 

What do working retirees need to know about Social Security?

Let’s find out.

Why Are Retirees Working Longer?

Retirement is often synonymous with relaxation, but is there a benefit to not hanging up your hat?

Lifestyle Reasons

Several new and seasoned retirees find it challenging to create new routines. While it’s good not to get too stuck in the way you always do things, some sense of order and regularity to your life can inspire action and purpose. 

Working gives retirees a chance to build new routines that suit their desired lifestyle. Perhaps you only want to work a couple of days per week or embark on a passion project or even dive into volunteer work. No matter what you choose, there are several ways that working can bring stability to the next phase of your life.

Think back to the good elements of your job. Perhaps you worked for a company you believed in or maybe you were lucky enough to enjoy and feel connected to your work. But even more likely, you probably think back on the meaningful moments with the people around you—late lunches, happy hour gatherings, dinners, etc. Community is such an important component of your job and something that many retirees lack, especially in the beginning. 

Working a job, even part-time, exposes you to different people and allows you to make new connections and form friendships. Time and time again research has shown that retirees with healthy social connections are happier and find more joy in their daily lives.

Financial Reasons

Retirees aren’t just working for fun, some rely on the paycheck to support their lifestyles. It’s challenging to save enough money for your dream retirement and it may have to be supplemented with a regular paycheck until you build the nest egg you need. Top tips to save more before you retire:

  • Max out your retirement accounts
  • Take advantage of catch-up contributions
  • Increase contributions to brokerage accounts
  • Fund your HSA 

Working longer can also boost your monthly Social Security check. Since benefits are calculated by lifetime earnings—35 of your highest income-earning years—an extra year or two at your higher-paying job could have an effect on your monthly benefits. 

Where Working and Social Security Intersect

You may decide that working in retirement will enhance and enliven your lifestyle. Excellent! What does that decision have to do with Social Security?

Social Security is one of the most important elements of your retirement plan. Building a solid strategy for you and your spouse to maximize your benefits can have a drastic impact on your spending, income projections, and bottom line. 

A driving factor of your monthly Social Security benefit is when you decide to collect or enroll in the program. Let’s look at a quick recap. 

  • The earliest you can enroll is at 62 (unless you are a widow/widower, have a disability, caring for a minor child, or another qualified dependent). Enrolling so early results in about a 30% reduction in benefits.
  • You’re eligible for your primary insurance amount (PIA) or 100% of your benefit once you reach full retirement age (FRA), which is 67 for those born in 1960.
  • After FRA, you earn delayed retirement credits which periodically increases your monthly benefit. Those credits stop accruing at 70. Should you wait until you’re 70, you could see an increase of about 25% to your benefit.   

Enroll too early and you look at permanent benefit reduction, but enroll too late and you could miss out on the inflated monthly checks. 

Enrolling in benefits before full retirement age while working could result in another penalty via the earnings limit. 

What is the Earnings Limit?

The Social Security Administration issued an earnings limit, which caps how much money a person can earn and still collect their benefits before full retirement age. The earnings limit is adjusted annually, and for 2021 it’s $18,960. For every $2 you earn above that limit, $1 in benefits is withheld. 

Let’s say you collected benefits at 65, your full retirement age is 67, and you made $35,000—more than $16,000 over the annual limit. This means that the SSA would withhold $8,020 in benefits. 

Luckily, the earnings limit becomes much more lenient in the year you reach your full retirement age. The earnings ceiling skyrockets to $50,520 and $1 is withheld for every $3 over the limit. In the example above, making $35,000 in the year you reach full retirement age wouldn’t result in any benefit withholdings. 

Once you reach full retirement age, the earnings limit no longer applies. This provides even more incentive to at least wait until FRA to enroll in benefits. That way, you can work and earn as little or as much as you’d like without having to worry about how your Social Security benefits are impacted. 

Are the Benefit Withholdings Permanent?

There’s a common misconception that the benefits lost as a result of the earnings limit are permanent, but that’s not the case. Those benefits are simply withheld and will be periodically paid back once you reach full retirement age. 

The SSA increases your monthly check to account for the withheld benefits, but that adjustment often doesn’t happen until January after your birthday. 

If the benefits aren’t lost, why be concerned about the earnings limit?

  • The withheld benefits could be a significant part of your spending projections.
  • You need the money for daily expenses. 
  • You want to maximize your Social Security benefits.
  • You don’t want to wait years for the withheld benefits to hit your account.

The SSA doesn’t repay your benefits in one lump sum. Instead, they periodically increase your monthly checks, meaning it could take a long time to get your withheld benefits back. 

Build a Social Security Plan You Can Count On

A Social Security strategy that accounts for your income needs, tax situation, lifestyle considerations, and more is critical to a robust retirement plan. We love working with married couples to help them maximize their financial resources to live a life they love, together.

Would you like to see if your Social Security strategy is best suited for your long-term retirement plan? Set up a time to talk with our team today.