If you're recently retired or nearing retirement, but you're thinking of continuing to work during retirement, there are a number of things you need to consider when it comes to your finances. One of the most important factors to understand is how this could impact your Social Security benefits. Keep reading to learn more about how working in retirement affects Social Security and your finances today and down the road.
What is Social Security?
Social Security is a payroll-tax-funded retirement program for U.S. citizens. It's designed to provide monthly financial support to qualified individuals during retirement. Payments depend on your eligible earnings and program contributions history.
Generally, eligible Social Security recipients must have worked for at least 10 years to receive benefits.
Social Security benefits can be claimed as early as age 62. However, those who wait until their full retirement age (usually 66 or 67, depending on your birth year) receive a higher benefit. And those individuals who delay claiming benefits beyond their full retirement age will receive payments that are as much as 8% higher.
How Working Impacts Social Security
You can actually increase your social security benefits by working during retirement because the longer you wait to collect benefits, the more you can collect per month. Additionally, you can increase your average career earnings which can, in turn, increase your social security payments.
On the flip side, you can also collect social security while working. However, some restrictions exist on how much you can earn while collecting benefits.
Here's how it works.
If you are at or over full retirement age, your earnings won't impact your benefit payments. You can keep all of your benefits without any deductions.
If, however, you haven't yet reached full retirement age, for every $2 that your earnings exceed the yearly earnings limit ($19,560 for 2022), your benefits will be reduced by $1.
If you're working and will reach full retirement age in 2022, for every $3 that your earnings exceed the limit ($51,960 for 2022), your benefits get reduced by $1 until the month following your birthday. For example, if your full retirement age is 67 and you turn 67 in July, benefit deductions would end in August; your benefits would be reduced from January through July.
Benefit deductions get calculated on wages or net-self-employment income, including bonuses, commissions and vacation pay. Whether you work full-time or part-time in retirement, your social security benefits depend on the amount earned and not the hours worked.
Alternatively, if you work when you reach retirement age, you can delay benefits until you stop working. This may result in larger future payments.
Note: The rules differ for your first year of retirement, if you receive Social Security disability, Supplemental Security Income or if you have self-employed income.
Suspending Payments When You Return to Work
What happens to your Social Security payments if you retire, change your mind and then want to return to work?
As long as you started claiming Social Security within the past 12 months, you can cancel your application for Social Security payments. This is known as a "withdrawal of benefits." However, you must repay any benefits you've already received.
If more than 12 months have passed and you're at full retirement age, you can voluntarily suspend your benefits and delay them until the age of 70, at which point you'll automatically begin receiving them.
Social Security, Work and Taxes
If you're simultaneously working and collecting Social Security benefits, up to 85% of your benefits may be taxed. For example, if your federal tax return gets filed as an individual and your combined earnings are between $25,000 and $34,000, up to 50% of your benefits may get taxed. If you earn over $34,000, that number increases up to 85%.
When you file joint returns, couples with combined earnings between $32,000 and $44,000 will pay up tax on up to 50% of benefits, and if earnings exceed $44,000, that increases to 85%.
Continuing or returning to work in retirement does affect your Social Security benefits, and in turn, your retirement finances. If you're working in retirement and earning income, you can contribute to Social Security and also collect it. Yet, you can also delay it to maximize your benefit payments down the road. Understanding how working after or through retirement impacts your Social Security payments will allow you to make the best decisions for your finances in retirement.