More than half of Americans surveyed by Voya Financial plan to work in retirement. If you share that plan, you may assume that you can easily combine paid employment with other sources of retirement income, such as your retirement savings and Social Security.
However, if you claim Social Security before your full retirement age — which is based on your year of birth — your benefits may be reduced through a mechanism known as the Social Security earnings test. Essentially, this rule limits your benefits if your paid employment earnings exceed certain thresholds.
The good news is that once you reach full retirement age, the benefit amounts that were withheld due to the earnings test will be returned to you in future Social Security payments. However, that doesn’t help when you are trying to balance your budget during the early years of retirement.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
How the earnings test works
The impact of the earnings test on your benefit can be broken down into three distinct phases. Each phase is based on your current age relative to your full retirement age.
- Stage 1: You will not reach full retirement age in 2021: In this stage, you can earn as much as $18,960 a year from employment without affecting your Social Security benefits. There will be a $1 reduction in Social Security payments for every $2 of earnings over the $18,960 limit. In the event of a reduction, Social Security withholds benefits in the form of whole payments at the beginning of the year. If Social Security withholds too much, that means money will be refunded in the next calendar year.
- Stage 2: You will reach your full retirement age in 2021 If you will reach your full retirement age during 2021, the earnings test is much less restrictive. You can earn as much as $50,520 a year from employment without affecting your benefit. There will be $1 reduction for every $3 of earnings over the $50,520 limit.
- Stage 3: You reached your full retirement age before 2021: If you have already reached your full retirement age before 2021, the earnings test doesn’t apply to your earnings. You are free to earn as much as you want while receiving your full benefit.
Special Rule: A special rule exists for filers that fall into phase 1 and 2 who retire from employment mid-year. Regardless of your earnings, if you stop receiving employment income once you collect Social Security, you can collect your entire benefit without reduction due to the excess earnings test.
Social Security claiming primer
The amount of your Social Security benefit depends on your earnings history and your age. Social Security benchmarks all benefits around the concept of full retirement age, which for those born between 1943 and 1960 is between ages 66 to 67.
At full retirement age you receive what is known as your full benefit or primary insurance amount (PIA). If you claim Social Security before your full retirement age, your benefit is reduced. Similarly, if you claim after your full retirement age, your benefit is increased.
The earliest you can claim Social Security is age 62; the latest you can claim to receive the maximum potential benefit is age 70.
Social Security Full Retirement Age Table
Source: U.S. Social Security Administration
Managing employment and Social Security benefits
Ultimately, the Social Security earnings test does not affect the benefit you receive over the course of your retirement because Social Security will make up any benefit reductions later when you reach full retirement age.
However, this isn’t much comfort when you’re trying to balance your budget in early retirement. That’s why it’s critical to understand the earnings test and weigh all of your possible options when making your Social Security filing decision.
Amy Buttell contributed to this article.
Advisory services offered through J.W. Cole Advisors, Inc & Blue Financial are unaffiliated entities. No information provided is intended as a solicitation to buy or sell any security. Blue Financial is an independent financial services firm helping individuals create retirement strategies using a variety of investment and insurance products to custom suit their needs and objectives. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax, or investment advice.
Licensed Insurance Professional. The licensed professional can provide information, but not advice related to social security benefits. The licensed professional may be able to identify potential retirement income gaps and may introduce insurance products, such as an annuity, as a potential solution. For more information, contact the Social Security Administration office, or visit www.ssa.gov. 20988 - 2021/5/3
-
The Retirement Bucket Rule: Your Guide to Fear-Free SpendingForget market declines or rising inflation. With this strategy, you won’t have to worry about any of that during retirement.
-
How Big Will the Fed Rate Cut Be This Fall?A dismal July jobs report has lifted expectations for fall rate cuts. But just how low could the fed funds rate be by year's end?
-
Five Ways to Maintain Charitable Giving During Volatile Times: A Giver's GuideWhen the economic outlook is uncertain, charitable giving is even more important — and impactful. You can be strategic by using donor-advised funds, diversifying assets and prioritizing unrestricted gifts.
-
Avoid Medicare's 'Shadow Tax' With This Financial Expert's IRMAA-Busting TipsYou're cruising along in retirement, and then bam: Your Medicare premiums soar because your income crossed the limit. Take a breath. There could be a solution.
-
Grilling Season and ETFs: There's More Than One Way to Cook Up a PortfolioExchange-traded funds come in a multitude of 'flavors' these days, from passive to active to factor-based. Their flexibility is what makes them so delicious.
-
You Don't Want It, But You Should Plan for It Anyway: An Expert Guide to Long-Term CarePlanning for long-term care is crucial to protect your independence, family and financial stability against unexpected health events and rising care costs not covered by standard insurance.
-
Five Questions to Help Ensure a Happy, Secure RetirementYou need to drill down to what you really want out of retirement. Then you can get down to the business of crafting a financial plan to make it happen.
-
I'm a Financial Adviser: This Is How You Can Save for Big Goals Even if You Feel Like You're Barely Getting ByLearning good financial habits — building an emergency fund, paying down debt, saving consistently — gives you flexibility, options and a path to security.
-
How to Buy an Annuity Online (Without Regret)You should never be rushed into buying an annuity. But now that they can be sold quickly and easily online, you need to be more alert than ever to pushy salesmanship. Here are four signs you're working online with a professional.
-
How Much Income Will an Indexed Annuity Get You? An Annuities Expert Lays Out the NumbersGuaranteed lifetime income sounds great, but how much will it be? Several factors determine your future payout on indexed annuities with an income rider.
