How Working During Retirement Will Change Your Social Security Benefits

Katie Brockman, The Motley Fool

While retirement is a lifelong dream for many workers, some people are choosing to continue working for as long as they can.

Roughly a third of baby boomers say they plan to work until past age 70 or never fully retire at all, according to a survey from the Insured Retirement Institute. Also, around 17% of retirees return to work after a period of not working, a survey from staffing solutions firm Adecco found.

Sometimes people continue working during retirement because they're passionate about their careers, but other times retirees are forced to pick up part-time jobs because they don't have enough savings to make ends meet. Working during retirement can be a smart move, especially if your savings are lacking, but if you're also going to be depending on Social Security benefits, it's important to understand how your income can affect your monthly checks.

Stacked Social Security cards

Image source: Getty Images

Balancing Social Security benefits and retirement

Retirement and claiming Social Security benefits often go hand in hand, but they don't necessarily have to happen simultaneously. The earliest you can claim Social Security is age 62, but you'll receive more money in each check if you hold off on claiming benefits, up until age 70.

The age at which you claim benefits doesn't have to align with when you retire, though. You could retire at age 50 and wait to claim benefits until age 70. Or you could file for Social Security at age 62 and work until you're 90. Many people choose to claim benefits when they retire because they need the extra income, but if you continue working after you file for Social Security, either part-time or full-time, your monthly benefit amount could be reduced or withheld altogether if certain conditions are met.

Whether your benefits are reduced depends on a couple of factors, including your full retirement age (FRA) and how much you're earning. Your FRA is age 66, 67, or somewhere in between depending on the year you were born, and if you claim Social Security at this age, you'll receive the full benefit amount you're theoretically entitled to.

If you claim benefits before your FRA and you're still working, your benefits may be reduced depending on how much you earn. In the years leading up to your FRA, for every $2 you earn above the 2019 income limit of $17,640, your benefits will be reduced by $1. Then in the year you reach your FRA, up until the month you actually reach your FRA, your benefits will be reduced by $1 for every $3 you earn above a different limit of $46,920.

Confused yet? If so, that's understandable -- but it's not quite as complicated as it may seem. To get a better sense of how your benefits are affected by your income, let's look at a hypothetical example.

How income limits affect your benefits

Say you're 63 years old and claimed benefits late last year, and you're receiving $1,000 per month. Your FRA is 67 years old, and you just picked up a part-time job earning $25,000 per year. Because you haven't reached your FRA yet, your benefits will be reduced by $1 for every $2 you earn above the limit of $17,640. You're earning $7,360 above that limit, so your benefits will be reduced by $3,680 per year.

Then in the year you turn 67, you're subject to the new limit of $46,920. Because your income is under that limit, your benefits won't be reduced at all.

Keep in mind, too, that these reductions aren't permanent. Once you reach your FRA, your benefits will no longer be limited by your income, and your monthly Social Security checks will be adjusted to account for all the reductions you received. So in this example, once you turn 67, you'll go back to receiving your $1,000 checks plus an additional amount each month to make up for all the months that you didn't receive anything because of the reductions.

Another thing to consider is that depending on how much you're earning, your benefits could be completely withheld. Say that instead of earning $25,000 per year working part-time, you instead continued working full-time earning $60,000 per year. That's $42,360 more than the $17,640 limit, so your benefits would be reduced by $21,180 per year. That'd entirely wipe out your Social Security.

Strategy matters when deciding when to claim benefits

Before you claim Social Security benefits, think about whether you intend to continue working in some capacity. If so, how will your income stack up to the Social Security income limits?

If you expect to be earning a significant amount of money -- so much that you may have your benefits withheld completely -- it may be a good idea to hold off on claiming Social Security until your FRA or beyond. After all, if you won't be receiving any of your benefits until your FRA anyway, why bother claim them early?

There are also perks to waiting until after your FRA to claim Social Security -- primarily, you'll receive fatter checks each month. If your FRA is 67 and you wait to claim your retirement benefits until age 70, you'll receive a 24% boost on top of the full amount you're entitled to. So if you don't need that money to pay the bills and make ends meet, you might as well hold out for those bigger checks.

On the other side of the coin, if you're claiming benefits earlier than your FRA because you need the extra money, consider how helpful that money will actually be if your checks are reduced because of your income. If you're banking on an extra $1,000 per month in benefits but you only receive $500 because you're still working, is that enough to cover all your expenses? If not, you'll need to consider how you will bridge the gap.

Claiming Social Security benefits isn't as straightforward as it sounds, and there are many factors that determine how much you'll receive each month. Working during retirement can significantly help prepare your savings to last the rest of your life, but make sure you know how your income will affect your benefits. By thinking ahead and considering all your options, you'll be more prepared to claim benefits at the age that's right for you.

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