How Returning to Work Impacts Social Security Benefits


The ins and outs of working while receiving Social Security, including 2020's new higher limits on how much you can make without getting penalized. 


Retired at last! You start Social Security payments, glad to finally be free of the 9-to-5 routine. But then life changes, and you realize you need more income than your monthly government check provides. Or you surprise yourself by becoming bored, and take a part-time job to have a little something to do. Maybe you are managing just fine, but an interesting offer comes up for consulting, or employment at the company of your dreams. These and other scenarios may incentivize you to work while receiving Social Security benefits. Here is what you should know about potential reductions to benefits while you are earning income.

Age is Key


If you have already reached full retirement age (FRA) when you claim benefits and/or return to work, then you can earn any amount without penalty. Check the chart below for your FRA.


Year of BirthFull Retirement Age
1943 to 195466
195566 and 2 months
195666 and 4 months
195766 and 6 months
195866 and 8 months
195966 and 10 months
1960 or later67

Data from Social Security Administration


If you return to work before reaching your FRA, $1 in benefits will be withheld for every $2 you earn above the annual limit ($18,240 for 2020). For example, if you retire early and go back to work before your full retirement age and earn a salary of $30,000, you'll be $11,760 over the annual limit. Therefore, your Social Security benefits will be reduced by $5,880.

However, if you return to work the year you reach FRA, the limit rises to $48,600. In addition, only the earnings you make before the month you reach FRA are counted. Sounds complicated, but a couple of examples make it easier to understand:

You work the entire year you reach full retirement age in June. From January 31 to May 1, you earned $15,000. That's under the limit, so your benefits for the year remain the same. 

You work the entire year you reach full retirement age in June. From January 31 to May 1, you earned $50,000. You earned $1,400 over the limit, so your Social Security is reduced by $700.

It is worthwhile to note that your Social Security check reductions will all be taken at the beginning of the year, and not averaged out over the year. If your benefit is $1,000 a month, say, and $3,500 of it will be withheld, then you will receive no check at all for the first four months, and the final $500 you are owed will be sent in December. For a more complete explanation of how earnings limits work, see the Social Security Administration's (SSA's) How We Deduct Earnings From Benefits

Reduction is Temporary


The amount of Social Security benefits withheld is temporary. Once you hit FRA, your benefit amount is recalculated and assigns you credit for those months you did not get a benefit because of earnings. However, it does not get repaid in one lump sum. Check this article for a complete explanation.

Another point to keep in mind is that you must keep paying into Social Security for as long as you continue to work. This may be in your favor, since benefits are calculated using your highest 35 years of income. Adding working years will replace any when you didn't work at all, or when you earned less money. 

If you want to check how much working will reduce your annual benefits, use the SSA's Retirement Earnings Test Calculator. To get the long version of this article straight from the horse's mouth, see the SSA's publication about How Work Affects Your Benefits

Taxes


You may wonder if returning to work will change how your Social Security benefits are taxed. It all depends on your MAGI, or modified adjusted gross income. As that increases above a certain level, a larger percentage of your benefits may be subject to tax, up to a maximum of 85%. 

As far as state taxes are concerned, only thirteen states collect income tax on Social Security benefits. That number can be misleading. For example, although Colorado will tax Social Security income, the state exempts $20,000 in annual retirement income 

As you consider the effects of taxes on returning to work, it is wise to consult a financial advisor or other trusted financial professional for guidance. 

Many retirees have found a happy medium between leisure and work. You can certainly be one of them, but do not go back to work with your eyes closed to all of the consequences on your wallet. Check out the tools and publications available from the SSA, and consult a professional for advice on making Social Security work in your favor. 


Sources:

https://www.fool.com/retirement/2019/10/26/here-are-the-2020-social-security-earnings-tests-l.aspx
https://www.ssa.gov/pubs/EN-05-10069.pdf
https://www.schwab.com/resource-center/insights/content/retired-but-thinking-of-going-back-to-work
https://www.ssa.gov/planners/taxes.html




Blog posting provided by Society of Certified Senior Advisors

www.csa.us