According to Transamerica’s 22nd annual retirement survey, 58% of currently employed people plan to work at least part time in retirement. Unfortunately, some of those people will do so out of necessity, but some do it because they wholeheartedly want to. It could be something to keep busy or a passion they couldn’t pursue during their career (like substitute teaching, for example).
Whatever the case, if you’re planning to work in retirement, it can be a blessing and a curse. The blessing comes when you have the freedom to choose when you want to work, instead of your financial situation dictating it. The potential curse is its effect on your Social Security benefits.
When you take Social Security benefits matters
You can start taking Social Security benefits at age 62, but your full retirement age (FRA) — which is the baseline for calculating your benefits — is determined by your birth year.
| Birth Year | Full Retirement Age |
|---|---|
| 1943 to 1954 | 66 |
| 1955 | 66 and two months |
| 1956 | 66 and four months |
| 1957 | 66 and six months |
| 1958 | 66 and eight months |
| 1959 | 66 and 10 months |
| 1960 or after | 67 |
Data source: Social Security Administration
Social Security gives you three main options for claiming benefits: Take them early and have your amount reduced depending on how far out from your FRA you are, take them at your FRA, or delay them until you reach 70 and receive increased payments. There’s no right or wrong way to do it, either. Some people want their money as early as possible, some want to hold out for the bigger monthly checks, and others are indifferent. It’s always best to do what fits your personal situation.
If you decide to take your Social Security benefits before your FRA, that doesn’t mean you have to stop working and making money; you just need to monitor how much you make.
Earning too much could cost you
Working while taking benefits before your FRA will subject you to the retirement earnings test (RET). For 2022, the annual earnings limit is $19,560. For every $2 earned over that amount, Social Security will reduce your benefits by $1. For instance, if you earn $29,560, $10,000 more than the earnings ceiling, you could expect your benefits to be reduced by $5,000. If you’ll reach your FRA in 2022, the most you can make leading up to your FRA is $51,960. In this case, your benefits will be reduced by $1 for every $3 you earn above this amount.
Crossing the allowed threshold may further reduce your benefits before you reach FRA, but the money is essentially withheld. Once you reach your FRA, the reduced amount is added to your benefits. For example, let’s assume your FRA was 67 and you decided to take benefits at 62 while making over the allowed limit. If the RET lowered your yearly benefits by $2,000 annually, Social Security would’ve withheld $10,000 over the five years until you reached age 67. Once you reach 67, that $10,000 will be added to your monthly benefits, spread out over time.
Working should be a choice
If you’re working in retirement, it should be because you want to, not because you have to. And the best way to make sure this is the case is by being intentional with your retirement savings and using all the available resources. Retirement accounts, such as a 401(k) and IRAs, are designed to help you save and invest for retirement, so it’s in your best interest to take advantage of them.
Since you should be saving for retirement anyway, you might as well get tax breaks along the way. It can save you money in the present and help secure your retirement finances.
