Increasingly, workers nearing retirement age are choosing to slow down rather than stepping away from work completely. Easing into retirement can be a great idea; quitting work cold turkey can make for a stressful transition. However, it does bring up the question of retirement income and Social Security. It is possible to collect Social Security benefits while you’re still working, but it may not be a good idea in some instances.
If You’ve Reached Full Retirement Age
Your Full Retirement Age (FRA) is somewhere between age 66 and 67, depending upon the year in which you were born. If you’ve already reached your FRA, there are no issues that would cause you concern. You can continue to work (and collect income) with no impact to your Social Security retirement benefits.
However, if you’ve yet to reach your FRA, things become more complicated.
Years Before You Reach Full Retirement Age
If the year in which you reach your FRA is in the next calendar year or beyond, your Social Security retirement benefits may be reduced. How much are they reduced? For every $2 you earn above the earnings limit, your retirement benefits are reduced by $1. Conceivably, you could earn enough to completely eliminate your Social Security benefits during these years.
The limit on what you can earn is known as the Earnings Exempt Amount. In 2021, the limit is $18,960. If you earn more than that, Social Security will start reducing your retirement benefits. The earned income limit is indexed for inflation and increases each year, so be sure to confirm this amount if your FRA occurs in 2022 or beyond.
It’s important to note that, if your benefits are reduced, they are not lost forever. Your Social Security retirement benefits are recalculated and added back once you reach your Full Retirement Age. In other words, your benefits aren’t lost – they’re simply delayed.
Once you reach your FRA, benefits are no longer subject to the earnings limitation.
The Year You Reach Full Retirement Age
The rules change a little bit during the year you reach your FRA. Instead of having your benefits reduced by $1 for every $2 you earn, you instead have your benefits reduced by $1 for every $3 you earn. This reduction applies to each month you receive earned income prior to reaching your FRA.
In addition, the Earnings Exempt Amount for the year you reach your FRA is higher. For retirees reaching their FRA in 2021, the Earnings Exempt Amount is $50,520. Therefore, you can earn a greater amount before any reductions are applied. Of course, these limits are indexed for inflation as well.
In the year you reach your FRA, the earnings limit only applies to the months before you reach your FRA date. For instance, let’s assume you were born on April 30th, 1955. Social Security considers your Full Retirement Age to be 66 years and 2 months. That gives us an FRA date of June 30th, 2021.
In this case, if you’ve earned $50,520 or less before June 30th, none of your Social Security benefits will be reduced in 2021. Any additional earnings from July through December will not apply toward the income limitation.
What Counts as Income?
When it comes to the income limitation, Social Security uses the IRS’s definition of “earned income”. In general, it would be any type of income earned by working for yourself or others. Income from investments and unemployment income do not count toward these calculations.
Claiming Social Security While You’re Working
Given the low earnings income limitations in the years before your FRA, it’s often a great idea to delay your Social Security benefits if you expect any earned income during those years. Unless you’re only working a few hours each week to stay busy and entertain yourself, it’s best to wait.
During the year that you reach your FRA, the decision to claim Social Security while you’re working becomes more difficult. The earnings limit is much higher, and the benefits are reduced less. If you do end up having your benefits reduced, no worries – your benefits will be recalculated in a few months when you reach your FRA.
Of course, life can change quickly. If you retire (or are laid off) early in the year, applying for Social Security may be the best move at that time. If, later in the year, you decide to go back to work, you have the option to withdraw your application for retirement benefits. Any decision you make doesn’t have to be final.
If you’re still wondering if it’s right for you to begin Social Security while you’re working, then click here to set up a quick, complimentary introduction call to see if Prana Wealth is a good fit. We do still have the capacity to take on new clients.
As a fee-only financial advisor in Atlanta, we can (and do) work virtually with clients all across the U.S. and we’re here to help you when you’re ready.