Objective information about retirement, financial planning and investments

 

Social Security and Working – What You Need to Know

Share

In today’s world of early or semi-retirement, many people wonder when they should begin taking their Social Security benefits. The combination of Social Security and working can complicate matters a bit. You can begin taking your benefit as early as age 62, but that is not always the best choice for many retirees. If you are working either at a job where you are employed or some sort of self-employment, you need to analyze the pros and cons based on your situation.

Full retirement age

 Your full retirement age or FRA is the age at which you become eligible for a full, unreduced retirement benefit. FRA is an important piece in understanding the potential implications of working on your Social Security benefit.

Your FRA depends on when you born:

  • If you were born from 1943 -1954 your full retirement age is 66
  • If you were born in 1955 your FRA is 66 and two months
  • If you were born in 1956 your FRA is 66 and four months
  • If you were born in 1957 your FRA is 66 and six months
  • If you were born in 1958 your FRA is 66 and eight months
  • If you were born in 1959 your FRA is 66 and ten months
  • If you were born in 1960 or later your FRA is 67

Source: Social Security

Social Security and working

If you are working, collecting a Social Security benefit and younger than your FRA your benefits will be reduced by $1 for every $2 that your earned income exceeds the annual limit which is $18,240 for 2020. This increases to $18,960 for 2021. Earned income is defined as income from employment or self-employment.

During the year in which you reach your full retirement age the annual limit is increased. For 2020 this increased limit is $48,600. for 2021 this limit is $50,250. The reduction is reduced to $1 for every $3 of earnings over the limit.

This chart shows the monthly reduction of benefits at three levels of earned income for 2021.

                                         Reduction of Benefits – 2021

Age $25,000 earned income $60,000 earned income $75,000 earned income
Younger than FRA $252 per month $1,710 per month reduction $2,335 per month reduction
Year in which you reach FRA No reduction $271 per month reduction $688 per month reduction
FRA or older No reduction No reduction No reduction

Source: Social Security

Temporary loss of benefits

The loss of benefits is temporary versus permanent. Any benefit reduction due to earnings above the threshold will be recovered once you reach your FRA on a gradual basis over a number of years. However, your benefit will be permanently reduced by having taken it prior to your FRA. This means that any future cost-of-living adjustments will be calculated on a lower base amount as well.

A one-time do-over 

Everyone is allowed a one-time do-over to withdraw their benefit within one year of the start date of receiving their initial benefit. This is allowed once during your lifetime. This is called withdrawing your benefit.

One reason you might consider this is going back to work and earning more than you had initially anticipated. This is a way to avoid having your benefit permanently reduced. You would reapply later when you’ve reached your FRA, or your earned income is under the limit. Your benefit would increase due to your age and any cost-of-living increases that might occur during this time.

When you do take advantage of this one-time do-over, you must pay back any benefits received. This includes not only any Social Security benefits that you received, but also:

  • Any benefits paid based upon your earnings record such as spousal or dependent benefits.
  • Any money that may have been withheld from your benefits such as taxes or Medicare premiums.

Social Security and income taxes 

Regardless of your age or the source of your income, Social Security benefits can be taxed based upon your income level. This could certainly be impacted from income earned from employment or self-employment, but it also includes other sources of taxable income such as a pension or investment income.

The amount of the benefit that is subject to taxes is based upon your combined income, which is defined as: adjusted gross income + non-taxable interest income (typically from municipal bonds) + ½ of your Social Security benefit.

The tax levels are:

Tax filing status Combined income % of your benefit that will be taxed
Single $25,000 – $34,000 Up to 50%
Single Over $34,000 Up to 85%
Married filing jointly $32,000 – $44,000 Up to 50%
Married filing jointly Over $44,000 Up to 85%

Source: Social Security

The Bottom Line 

The decision when to take your Social Security benefit depends on many factors. If you are working or self-employed you will want to consider the impact that your earned income will have on your benefit.

You should also understand that your benefits can be subject to taxes at any age over certain levels of combined income, regardless of the source of that income.

Approaching retirement and want another opinion on where you stand? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if it’s right for you. Financial coaching focuses on providing education and mentoring regarding the financial transition to retirement.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

Photo by Sharon McCutcheon on Unsplash

Small Business Retirement Plans – SEP-IRA vs. Solo 401(k)

One of the best tax deductions for a small business owner is funding a retirement plan. Beyond any tax deduction you are saving for your own retirement.  As a fellow small businessperson, I know how hard you work.  You deserve a comfortable … [Continue reading]

Review Your 401(k) Account

For many of us, our 401(k) plan is our main retirement savings vehicle. The days of a defined benefit pension plan are a thing of the past for most workers and we are responsible for the amount we save for retirement and how we invest that … [Continue reading]

4 Benefits of Portfolio Rebalancing

The past couple of years have been a roller coaster ride in the stock market. The S&P 500 lost 4.38% in 2018 mostly from a poor fourth quarter performance. The market recovered nicely in 2019 with the index posting a 31.49% total return for the … [Continue reading]

7 Tips to Become a 401(k) Millionaire

According to Fidelity in an update released in February of this year, the average balance of 401(k) plan participants stood at $112,300, up 7 percent from the balance at the end of the prior quarter. This data is from plans using the Fidelity … [Continue reading]

Required Minimum Distributions in 2020 – What You Need to Know

This was already a year of change for those impacted by required minimum distributions (RMDs). The SECURE Act signed into law at the end of 2019 includes some significant changes in RMDs starting in 2020. The CARES Act (passed in the wake of the … [Continue reading]

8 Portfolio Rebalancing Tips

In light of the recent stock market volatility, it’s important to review your asset allocation and consider rebalancing your portfolio if needed. This post looks at some ways to implement a portfolio rebalancing strategy. Here are 8 … [Continue reading]

401(k) Fee Disclosure and the American Funds

With the release and subsequent repeal of the Department of Labor’s fiduciary rules for financial advisors dealing with client retirement accounts, much of the focus in recent years has been on the impact on advisors who provide advice to clients for … [Continue reading]