Whether it’s a desire to contribute to society or to increase spendable income, many retirees decide to go back to work. Some have found their savings and investments eroded by the financial crisis, while others seek more substantial medical coverage. A few simply find that retirement isn’t all it was cracked up to be.
Whatever your reason, you’re not alone, as many people choose to return to work after retirement. However, you need to carefully consider how resuming an income will affect your finances. While you may think you’ll simply earn more money, in fact, by returning to work, you could jeopardize your Social Security benefits.
Can You Work & Collect Social Security?
If you are receiving retirement benefits, the determining factor as to whether you can simultaneously work and collect Social Security is the age at which you began receiving benefits. If you signed up to receive Social Security retirement benefits when you were younger than the full retirement age, then your benefits will be reduced by taking on a job.
Calculating Your Full Retirement Age
If you were born between January 2, 1943 and January 1, 1955, then your full retirement age is 66. If you wait to sign up for Social Security benefits until after your 66th birthday, then you can work and earn wages to your heart’s content without forfeiting any of your Social Security benefits. However, if you begin collecting Social Security at a younger age, your benefits will be reduced.
If you sign up for Social Security benefits prior to age 62, you will receive a reduced monthly benefit compared to what you would collect if you waited to apply after reaching your full retirement age.
Impact on Benefits
Let’s say that you are beneath the full retirement age and you are receiving Social Security retirement benefits. Then you decide to get a job. How much will your Social Security benefits be docked?
- Younger Than Full Retirement Age During the Entire Year. If you are younger than full retirement age during all 12 months of the current year, then $1 will be deducted from your benefits for every $2 that you earn above $14,640 ($1,220 per month) for the year.
- Younger Than Full Retirement Age for Part of the Year. If you reach your full retirement age during 2012, then $1 will be deducted from your benefits for every $3 that you earned above $38,880 ($3,240 per month) for the year until the month you reach your full retirement age.
For example, suppose you are age 62 and receive $1,000 each month in Social Security retirement benefits. Then you get a job that will pay you a $20,000 annual salary ($5,360 over the $14,640 limit). In this case, $2,680 would be deducted from your benefits – half of the amount of $5,360 that you exceed the imposed limit.
Social Security withholds your benefits payments for January through March, for a total withholding of $3,000. Then, in April, your monthly benefit of $1,000 resumes for the rest of the year, and you will receive the excess $320 that was withheld during the following January.
It might not seem fair, but a portion of your Social Security benefits may be subject to income tax. To determine how much of your benefits you must include in the income portion on your tax return, calculate your modified adjusted gross income (MAGI) by totaling the following items:
- Half of your total Social Security benefits for the year
- All your other income, such as pensions, wages, interest, dividends, and capital gain distributions
- Tax-exempt interest, such as interest on municipal bonds
If you are single or married and filing separately and your total MAGI is more than $25,000, then half of your benefits must be included as income on your tax return. If your MAGI total is more than $34,000, then you must include 85% of benefits in income. The threshold levels for taxpayers who are married filing jointly are $32,000 and $44,000, respectively.
The downside of earning a salary in addition to receiving Social Security benefits is that the combined total of your MAGI will probably be enough to cause part of your Social Security benefits to be taxed as income.
When it comes to the earnings limit, only wages or net self-employment earnings will be counted. You don’t have to worry about income from interest, dividends, pensions, annuities, capital gains, or other government benefits that you receive.
However, what happens if you retire, apply for Social Security retirement benefits, are under the full retirement age, and it’s late in the year? By the time you apply for your benefits, you’ve already received a salary in excess of the $14,640 limit. Fortunately, there is an exception for your first year of retirement – you will be allowed to receive a full Social Security check for any whole month that you are retired no matter how much you have earned during the year.
The Good News
If you’re disappointed about losing some of your benefits because you’ve earned too much in wages, don’t be. Those wages will be counted toward your future Social Security benefits, and you will reap the rewards for your hard work in the form of higher monthly benefits checks when you reach your full retirement age.
For example, you might retire at age 62 and begin receiving $750 a month in Social Security benefits. Then, at age 63, you take a full-time job for a year and earn enough such that your benefits are completely withheld.
Here is what could happen:
- If You Return to Retirement a Year Later: If you return to retirement at age 64, you will receive your $750 per month benefit. Then, at your full retirement age of 66, your benefits will be recalculated and your monthly benefit will increase to approximately $800.
- If You Work Until Age 66, Your Full Retirement Age: If you continue working until age 66 and earn enough so that your benefits are entirely withheld, at age 66 your monthly benefit will increase to approximately $1,000.
If you’re retired and thinking about going back to work, you should sharpen your pencil and outline the costs versus the benefits. You will have to incur the cost of a wardrobe, lunches, and transportation – and possibly the cost of care for a dependent child, parent, or partner. Compare that to the potential income before reaching your decision, and check the Social Security website for resources including a retirement earning calculator and an online application process.
Have you returned to work after retirement? What were your personal benefits and drawbacks?