Working While Receiving Social Security

Written By: Brian Ellenbecker, CFP®, EA, CPWA®, CIMA®, CLTC®

Many individuals rely on Social Security as a key source of income during their retirement years. However, you may still plan on working for a few years even after you become eligible for collecting Social Security. In this blog, we will discuss how working during your retirement age can impact your Social Security benefits.

If you are collecting Social Security and receive employment income while under full retirement age (FRA), your benefit could be reduced. The reduction only occurs for those under full retirement age. Once you reach full retirement age, your benefit will not be reduced regardless of how much employment income you might earn.

If You Work While Under Full Retirement Age

When you start collecting Social Security benefits, $1 in benefits will be deducted for every $2 you earn above an earnings limit ($21,240 for 2023). This limit is adjusted each year for inflation.

Example: Bill earns $60,000 per year as an employee. He will turn 64 in October 2023. He also is collecting Social Security retirement benefits. According to the Social Security rules, his FRA is 66 and 10 months. In 2023, when Bill is 64, his excess earnings will be $38,760 ($60,000 – $21,240). His reduction in benefits will be $19,380 ($1 reduction in benefits for every $2 over the $21,240 threshold).

In the Year You Reach Full Retirement Age

In this case, $1 in benefits will be deducted for every $3 you earn above the limit of $56,520, but only counting earnings before the month you reach FRA. This limit is adjusted each year for inflation.

Example: Amanda turns 66 in October 2023. From January through September of that year, she earned $75,000. Her excess earnings to that point would be $18,480 ($75,000 – $56,520). Her reduction in benefits for those 9 months would be $6,160 ($1 reduction in benefits for every $3 over the $56,520 threshold).

Retiring Mid-Year

If you retire at FRA or younger and stop working mid-year, employment income prior to collecting benefits is not counted, and the earnings test is applied on a monthly basis ($1,770) for the remainder of the first year.

What Counts as Income?

Earned income only includes wages, bonuses, commissions, etc. It does not include investment income (interest, dividends, capital gains), retirement plan distributions, pensions, alimony, worker’s compensation, unemployment benefits or other sources of unearned income.

If you are self-employed, only your net earnings from self-employment are counted. To determine if your services are “substantial”, the test is based on the number of hours worked, rather than the amount of income earned. If you devote more than 45 hours in the business or between 15 and 45 hours in a highly skilled occupation, services are considered to be substantial. If you spend less than 15 hours a month, the services are not substantial and there will be no reduction in benefits.

Other Benefit Collection Scenarios

If another person is collecting benefits off your record, their benefit could also be reduced if you’re working under FRA.

Spousal Benefits: A spouse can lose some or all their monthly benefits if the worker is under FRA and has earnings exceeding the thresholds discussed above. Also, if the spouse is under FRA and has earnings above the thresholds mentioned above, their monthly benefit will be reduced.

When both the worker and the spouse have earnings in excess of the earnings limitation, their total Family Maximum Benefit will also be reduced.

Divorced Spouse Benefits: If the worker has excess earnings above the previously discussed thresholds, this would not cause a reduction in the divorced spouse’s benefit, assuming the divorced spouse has been divorced from the worker at least two years or whose former spouse was entitled to receive benefits before the divorce. However, if the divorced spouse who is collecting the benefit has excess earnings, his or her benefit will be reduced accordingly.

Survivor Benefits: The same earnings tests apply here as they do to standard retirement benefits. However, a person receiving dependent’s or survivor’s benefits and has excess earnings will not see their excess earnings charged against the benefits payable to other dependents or survivors. For example, a child’s benefit will not be reduced if the mother has excess earnings.

 Child/Dependent Benefits: If the worker has excess earnings above the previously discussed thresholds, it would cause a reduction in the dependent’s benefit. However, a dependent’s wages will only reduce his or her own benefit.

How Reduced Benefits Are Applied

If a Social Security benefit is lost due to employment income, the reduction is not applied ratably to each check received throughout the year. Instead, the worker would not receive checks at all in the early part of the year then, once the total benefit reduction has been reached, the worker would start receiving monthly checks for the full monthly benefit amount later in the year. Those months in which a check was not received will not count as months where Social Security was claimed. This means that, once you reach full retirement age, your benefit amount will be recalculated as if you had not claimed Social Security during those months.

Example: Alex retired at 62 and started collecting a Social Security benefit of $1,500 per month. Alex works part-time and will earn $33,240 in 2023. This is $12,000 above the allowable earnings threshold, so Alex’s Social Security benefit will be reduced this year. Alex will not receive a Social Security check for the first 4 months of the year ($6,000/$1,500), but will receive a check for $1,500 each of the last 8 months of the year. If we assume Alex continues earning the same income and ignore inflation adjustments to Social Security benefits and the earnings threshold, when she reaches her full retirement age at 67, she will receive an increase in monthly benefits at that time. The Social Security Administration will consider Alex to have started collecting benefits at age 63 and 8 months, rather than at age 62 and 0 months, and increase her monthly benefit check accordingly at that time.

Prior to filing for Social Security, contact your Shakespeare Financial Advisor. We can help you determine the best age to file for benefits and how continuing to work will impact your financial plan. We are here to be your partner through this transition and provide peace of mind.