There may be various different reasons you decide to take a job after you retire, and while earning some money may or not be your primary reason, it is good to know how your earnings could affect your social security benefits.
There are different scenarios to consider. For example, you may have started to receive social security benefits before you reach full retirement age and you decide to continue working or go back to work. You could start receiving benefits once you reach full retirement age and then decide to go back to work. Or you could continue to work beyond your normal retirement age and postpone collection of social security benefits.
If you retire at full retirement age
According to the Social Security Administration, once you reach full retirement age you can work and still receive all your social security benefits, no matter how much you earn. There is no limit.
For social security purposes, your full retirement age depends on when you were born. If you were born January 2, 1942, through January 1, 1943, your full retirement age for social security retirement benefits is 65 years and 10 months. If you were born January 2, 1943, through January 1, 1955, your full retirement age is 66. This full retirement age gradually increases, up to 67 for persons born in 1960 or later.
In the Social Security Administration website at www.ssa.gov/pubs/10035.html you can find a table called “Age to receive full Social Security benefits” where you can look up your full retirement age according to the year you were born.
If you start receiving social security benefits early
When you start receiving social security benefits early, before you reach full retirement age, the Social Security Administration will withhold a portion of your benefits when your income from work exceeds a certain amount. For 2008 this limit is $13,560. If you are younger than full retirement age during all of 2008 and are receiving social security benefits, $1 of your benefits will be deducted for each $2 you earn above $13,560 for the year.
From January of the year in which you will reach your full retirement age until the month in which you actually reach full retirement age, $1 will be deducted from your benefits for each $3 you earn over $36,120 for the year (effective for 2008). Once you reach that month, no more deductions will be taken from your benefits, no matter how much you earn.
Earnings that count toward the limit include salaries, wages, bonuses, commissions, and vacation pay. Your earnings from self-employment are also included. Pensions, annuities, investment income, interest, capital gains, and government or military retirement benefits do not count toward the limit.
As pointed out by Emily Brandon in an article for U.S. News & World Report published on the Pension Research Council website, the portion of your benefits that is deducted is not lost forever. When your payments are reduced because you earn over the limit, your benefits will be recalculated to a higher amount when you reach full retirement age.
How the reduction in your benefits is withheld
As indicated by the Social Security Administration, they do not deduct a certain amount from each monthly benefit check when you earn over the limit for the year. They start withholding your entire monthly benefit in January of that year and continue withholding your checks each month until the amount of the reduction in your benefits is covered. Then the following month, your full monthly benefit resumes.
For example, assume you are age 62 and start collecting social security benefits of $600 per month in January 2008, for a total of $7,200 for the year. If you work and earn $24,000 for the year, you are $10,440 over the $13,560 limit. The Social Security Administration would withhold a total of $5,220 in benefits ($1 out of every $2, or 50% of $10,440). They would withhold all your benefit payments from January to September 2008 ($600 per month x 9 months = $5,400). You would start receiving your $600-a-month benefit in October and would receive it for the rest of 2008. In January of 2009 they would pay you the additional $180 withheld in September (total of $5,400 withheld minus the total of $5,220 that should be withheld).
In the case of the year you reach full retirement age, the calculation changes. Now Social Security withholds $1 for every $3 you earn above the $36,120 limit. If we assume you reach full retirement age in October and earn $40,500 from January to September, Social Security would withhold $1,460 in benefits ($1 for every $3 over the $36,120 limit). They would withhold your $600 monthly benefit from January to March ($600 per month x 3 months = $1,800). You would start receiving your regular benefit payment in April. In January 2009, Social Security will pay you the additional $340 withheld in March ($1,800 minus $1,460).
Special rule the first year you retire
There is a special rule for people who retire in mid-year, usually the first year of retirement, when they may have already earned more than the yearly limit. According to this rule, a person who is under the full retirement age can get a full Social Security check if monthly earnings are $1,130 or less (in effect for 2008).
For example, assume you retire at the end of October 2008, when you are 62. You earned $40,000 through October. If you take a part-time job in November earning $800 a month, you can receive a Social Security payment for November and December because your earnings for those months are below the monthly limit of $1,130, even though you exceeded the annual limit of $13,560. Then the following year, the yearly limit will apply.
If you decide to delay retirement
Working longer before you start receiving social security benefits could increase the amount of benefits you receive. This is because your social security benefits are calculated based on your top 35 earning years. If you earn more in the years when you are in your 60s, for example, than you did 30 years ago, your benefits will be higher than if you did not work in those later years.
Your benefits are recalculated every year, so when you can replace some low-earning years, perhaps when you just started your career, with some higher earning years later on, you can increase your benefit.
The Social Security Administration points out that this refiguring is an automatic process that is usually completed by October of the following year. For example, if your earnings in 2007 increased the benefit you are entitled to, you should get the increase by October, 2008, retroactive to January 2008.
Your social security benefits could be taxable
Taxes may be another consideration to take into account when you are working while receiving social security benefits. As pointed out by Cameron Huddleston in an article for Kiplinger published on the msn money website, when you continue working, your income increases. If your total income for the year is over a certain amount, a portion of your social security benefits could be subject to federal income tax.
In this regard, in addition to your earnings from work, you would also have to take into account any distributions you receive from an IRA. These distributions are taxable income and would increase your total income for the year. You will have to take at least the required minimum distributions from your IRA when you reach age 70 ½.
Emily Brandon, in her article for U.S. News & World Report, explains that when the sum of your adjusted gross income, nontaxable interest, and half your social security benefits is between $25,000 and $34,000 for individuals, and between $32,000 and $44,000 for married couples filing jointly, you would have to pay tax on up to 50% of your benefits. Above those upper limits, up to 85% of your social security benefits could be taxable.
One way to reduce the taxability of your social security benefits is to postpone them until a year when you expect your overall income to be lower. In Emily Brandon’s article, the idea of taking assets out of an IRA to finance living expenses in the meantime is offered as a possibility that may reduce the overall tax burden in the long run.
Sources:
msn money – Should you work during retirement?, by Cameron Huddleston, Kiplinger: http://moneycentral.msn.com
Pension Research Council – U.S. News & World Report – How Working Affects Retirement Benefits, by Emily Brandon: www.pensionresearchcouncil.org
Social Security Online – How Work Affects Your Benefits: www.socialsecurity.gov
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