Yahoo Finance Up to 50% of Pre-Retirees Don’t Understand the Basics of Working While on Social Security
Many retirees will find themselves with ever-changing employment situations, some constantly going in and out of the workforce. If you’re collecting Social Security benefits while employed, it’s good to know how adding extra income to the equation could affect your Social Security benefits.
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If you feel like this is a confusing topic that requires expert-level comprehension, you’re not the only one. Find out why the matter is so perplexing and learn more about the resources that can help you navigate your Social Security benefits while employed.
Confusion Persists About Working While on Social Security
According to a recent report by the Social Security Advisory Board (a bipartisan and independent federal agency), there’s a lot of uncertainty about the way the retirement earnings test (RET) works.
This test is used by the Social Security Administration to determine the amount of retirees’ monthly benefits. The report confirmed that much of the SSA’s documentation on the matter neglects to “clearly explain the key features of the RET, and not all the information is conveyed consistently across resources.”
The study also showed that between one-quarter and one-half of prospective retirees are unaware that working after claiming retirement benefits before full retirement age (FRA) might lower monthly benefits.
The Retirement Earnings Test Explained
The RET effectively defines what your benefits will be from Social Security if you are retired or, separately, if you are taking Social Security while still generating income.
For beneficiaries under the FRA, benefits are reduced by $1 for every $2 a beneficiary earns above an annual level ($21,240 for 2023.) In the calendar year that the beneficiary reaches FRA, benefits are reduced by $1 for every $3 earned above a higher earnings level. That higher level is $56,520 for 2023. The limits for 2024 will be slightly higher.
The annual limits change to account for inflation, but the principle is essentially the same. Earning above the SSA income threshold could mean a reduction in benefits.
Even with this plainly-stated language, the calculations can get a little dizzying, which account for multiple factors such as your age, exact date of birth, how soon you start collecting benefits and your earnings for a given year. The SSA’s website has a quick calculator to help you estimate benefits based on your situation.
Why Many Retirees Misunderstand the RET
Matt Willer, of Phoenix Capital Group, is a private asset investments expert with many clients in retirement who are collecting social security benefits. He has noted, “While many know that benefits are reduced due to earnings before FRA, most do not understand that this reduction is temporary.” He clarified, “the reality is they are just given to you later and amortized over a deferred schedule when you reach the ‘FRA’ or full retirement age.”
Willer also explained important considerations for retirees who might be faced with reduced benefits as they continue to work. “While the funds come back to you later on an amortized schedule, you have the opportunity cost of lost time, and what you could have done with that money had it been provided to you in the present, rather than in the future. For instance, if I can invest $5,000 today and double it in seven years, I may be precluded from that opportunity if a portion of my benefits are deferred.”
It’s also important to note that not all income counts towards SSA limits for getting benefits. When the SSA is calculating excess income for the RET, they’ll only consider income from wages or net earnings from self-employment which can also include bonuses, commissions and severance pay.
Income that doesn’t count towards the annual income limits includes:
Pension payments
Annuity payments
Dividends
Interest income
Capital gains
Veterans benefits, or other government or military retirement benefits.
Also, if you reach FRA, starting with the month you reach full retirement age, the SSA will not reduce your benefits no matter how much you earn.
As you can see, there are still plenty of scenarios where you can have income and still receive your full SSA benefit.
Why You Should Understand the RET
For those who are either retired or on the cusp of retirement, a common conundrum is whether or not to work while receiving Social Security benefits.
For some, the answer will depend on how much their SSA benefits are reduced versus the income they’ll earn from working. For others, it might be about the opportunity cost of waiting for benefits that can help their financial situation presently.
Another good reason to understand the RET is so that you properly report your projected wages to the Social Security Administration. If you expect to earn income in excess of the income limit for a given year, you should notify the SSA by calling the customer service line or visiting a local office. Otherwise, you could get a notice of overpayment, which could result in a debt to the SSA.
Tips on Working and Receiving Social Security
Understand Your Full Retirement Age
This is the age at which you’re entitled to receive your full Social Security benefits.
Consider Your Earnings
If you’re under the full retirement age and earn more than the annual limit, your benefits will be reduced (though they’re not totally lost, but rather recalculated and increased once you reach FRA).
Delay Claiming Social Security
If you’re still working, consider delaying your Social Security benefits. For every year you delay claiming past your full retirement age, your benefits will increase by approximately 8% until age 70.
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Understanding the rules and planning accordingly can help you optimize your SSA benefits as you continue working. Consult with an experienced CPA or financial advisor who can help you with this decision based on your specific circumstances.
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