Picking up a part-time job in retirement is an easy way to improve your retirement lifestyle. But before starting a retirement job, you'll want to run the numbers to see how your Social Security benefits might change.
If you start a new job after you begin receiving Social Security benefits, the payments you're eligible for could change. If you receive Social Security income while working:
— Your Social Security benefits might be temporarily reduced.
— The Social Security earnings limit depends on your age.
— The amount you earn can impact the benefits you receive.
— You might be eligible for a higher Social Security benefit later.
Read on to understand the consequences of working while receiving Social Security benefits.
Consider Your Social Security Full Retirement Age
Once you have turned your full retirement age, there is no limit on how much you can earn while collecting Social Security payments. Your full retirement age is based on the year you were born. The full retirement age for anyone born between 1943 and 1954 is 66 years old. Individuals born in 1960 or later have a full retirement age of 67.
"Your full retirement age is one of those critical dates in retirement that you need to know, especially when it comes to Social Security," says Andrew Wood, a retirement planning advisor with Daniel A. White & Associates in Middletown, Delaware. If you work while receiving benefits prior to full retirement age, "you could be impacted by the earnings test, which could reduce or even eliminate the checks you're planning to receive," Wood says.
[READ: How Much You Will Get From Social Security.]
How Much Can You Earn While Receiving Social Security?
If you opt to work while receiving Social Security before your full retirement age, you will only be able to receive a certain level of income before your Social Security benefit is temporarily reduced. The Social Security earnings limit is $1,630 per month or $19,560 per year in 2022 for someone who has not reached full retirement age. If you earn more than this amount, you can expect to have $1 withheld from your Social Security benefit for every $2 earned above the limit.
For example, suppose you are 65 years old, receive $2,500 in Social Security benefits every month and have a job that pays $2,000 a month. You are over the income limit of $1,630 by $370 each month. During a year, you will receive $24,000 from the job, which is $4,440 more than the annual earnings threshold of $19,560. As a result, $1 out of every $2 above the threshold will be withheld. In this case, $185 will be withheld every month from your Social Security checks. You can expect to receive $2,315 each month from Social Security. When you turn your full retirement age, your payments will be recalculated to give you credit for the withheld portion of your benefit.
[Read: What Is the Maximum Possible Social Security Benefit?]
The Social Security Earnings Limit Changes the Year You Reach Full Retirement Age
There's a different Social Security earnings limit for those who will turn their full retirement age in 2022, and the penalty for earning too much is smaller. "If you reach your full retirement age in 2022, the limit on your earnings for the months before your full retirement age is $51,960," says Chuck Czajka, a certified Social Security claiming strategist and founder of Macro Money Concepts in Stuart, Florida. If you earn more than $4,330 per month before you turn your full retirement age, $1 will be withheld from your benefit for every $3 in excess earnings.
For example, if you will reach your full retirement age in 2022 and you currently receive $2,500 a month from Social Security along with $4,500 every month from a job, part of your benefit will be temporarily withheld. Your income surpasses the Social Security earnings threshold by $170. You can expect to have your benefits reduced by around $57 each month, since $1 out of every $3 earned above the limit will be withheld until you turn your full retirement age.
Social Security Payments Are Only Withheld Temporarily
If you work while receiving Social Security benefits prior to reaching full retirement age and see a change in benefits, the adjustment is only temporary. "This is not a permanent reduction," says Kris Jerke, president of Ascend Financial in Sioux Falls, South Dakota. "You will receive credit for reduced benefits once you reach full retirement age."
You could end up receiving bigger Social Security payments later that reflect your continued earnings. "This is a great payout to consider if you are still healthy and able to work during the early retirement years," says Jared Weitz, CEO of United Capital Source in Garden City, New York.
[Read: How to Minimize Social Security Taxes.]
Working Can Make Your Social Security Benefit Taxable
If you are receiving Social Security benefits, you'll want to keep in mind that any income from working, withdrawals from traditional IRAs or 401(k)s and dividends and interest on your investments can contribute to making part of your Social Security payments taxable.
If the sum of your adjusted gross income, nontaxable interest and half of your Social Security benefit is higher than $25,000 as an individual and $32,000 as a married couple, a portion of your Social Security payments might be taxable. If these income sources are greater than $34,000 ($44,000 for couples), up to 85% of your Social Security benefit can be taxable. "The maximum amount of your Social Security subject to taxes is 85%, depending on your provisional income," Czajka says.
Can You Work and Collect Social Security Benefits?
Yes, you can work and collect Social Security benefits at the same time. However, if you are younger than your full retirement age, part of your Social Security payments may be temporarily withheld if you earn too much. Once you turn your full retirement age, there is no penalty for working while collecting Social Security benefits, and your payment will be increased to give you credit for benefits that were withheld in the past.