Q&A: Will ‘unretiring’ mean less Social Security?

I just turned 64, I’ve been retired for a few years, and I’m claiming Social Security. However, I’ve started to become a little restless, so I’m considering picking up some part-time work. Would that affect my Social Security payment?

- Carol in Michigan

Carol, before we address the Social Security component of your question, we want to point out that you’re a part of a larger trend we’re starting to see: ‘unretirement.’

In fact, research shows that more than a quarter of retirees decide, at some point in time, to return to the workforce.[i]  

Why do retirees make this ‘U-turn?’ Perhaps a financial shock. Possibly a yearning for the social connections. Or, as it sounds like you’ve discovered, the need to regain a sense of purpose.

No matter the reason, we wouldn’t be surprised if even more people begin to ‘boomerang’ from work to retirement and then back to work. It could very well be the new normal for an entire generation of Americans.  

Now, on to Social Security.

The age and earnings tests

Will returning to work impact your Social Security payment? As with most answers regarding Social Security, we have to answer it with, “It depends.”

Your benefit could potentially be reduced depending on two factors: your Full Retirement Age (FRA) and how much you’re making.

In your case, we’re assuming you were born in 1955, meaning your FRA is 66 years and 2 months. Since you’re only 64 and thus younger than your FRA, you would be subject to an earnings test.

Here’s how that earnings test works: If you make $17,640 or less from actual wages in 2019 (retirement income, such as pensions, annuities, investment income, or interest, and government benefits do not count) your benefit would not be reduced. (If you work for yourself, Social Security looks at net profits.)

However, for any earnings you make over this limit, Social Security will deduct $1 from your benefit for every $2 you earn. For example: Let’s say you’ll make $20,000 this year, which is $2,360 over the earnings threshold. Social Security would deduct $1,180 from your benefit this year (2,360/2 = 1,180).

And, just so you’re aware, this reduction would not come out of each month’s check, little by little. Instead, Social Security would withhold full monthly benefit payments until the reduction amount is met (the guidelines, unsurprisingly, can get a little confusing sometimes).

The reduction rules become a little less stringent if you’re working in the year in which you reach Full Retirement Age. The annual earnings limit gets bumped up to $46,920, and Social Security will only deduct $1 for every $3 you earn above that threshold.

Here’s the good news, especially if you plan on working for the foreseeable future: If you continue to work once you reach your FRA, you can earn as much as you’d like. Your benefit will not be reduced at any point.

Boosts to your benefit 

Now, before you start thinking, “That’s not fair they’re taking some of my money,” there’s an important point we want to clarify. Even if your benefit is reduced as you’re working, you will recoup that money eventually.

Once you reach your FRA, Social Security will recalculate your benefit to account for any withholdings/reductions and adjust your benefit accordingly. You’ll see the increase in your payment starting the following January. 

And keep this in mind: If you do decide to go back to work, this could potentially increase your future benefit amount as well, depending on your earnings history.

How? Your full benefit at your FRA is calculated using your 35-highest earning years. If your latest year of earnings happens to bump a lower-earning year off the list, this will help boost your benefit.

Social Security automatically reviews earnings records every year, so there’s no work on your part to make this happen. But we still recommend double-checking your earnings history for errors through your ‘my Social Security’ account at ssa.gov.

Another option to consider if you would like to increase your benefit? If you’re still working at Full Retirement Age, you can suspend your benefit.

This strategy would allow your benefit to earn ‘delayed’ credits – increasing it by 8% a year for each year you wait to claim until age 70 – meaning you would ‘lock-in’ a higher benefit once you stop working for good.

But making a decision like this depends on your financial situation and if your retirement income stream could handle a loss of a monthly benefit for a few years.

Don’t forget about taxes 

As you consider going back to work, and, by extension, earning more money, we want to share a word of caution. Because some pre-retirees – and even retirees – forget that Social Security benefits can be taxed.

How do you know if your benefit will be taxed? This is determined by the amount of your ‘combined income’ (adjusted gross income + non-taxable interest + half of your Social Security benefit).

For a single tax filer, if this number is between $25,000 and $34,000, up to 50% of your benefit is taxable at your ordinary income tax rate (between $32,000 - $44,000 for married couples filing jointly); if it’s higher than $34,000, up to 85% of your benefit is taxable ($44,000 when filing jointly).

As you can see, going back to work while simultaneously receiving a Social Security benefit can have wide-reaching ramifications on your individual financial situation. And it doesn’t stop there. If any family members are receiving a benefit based on your work record (such as a spousal benefit), their benefit will be impacted as well.

Making a financially savvy Social Security decision comes down to understanding the ins-and-out of the program. We recommend continually educating yourself so you can retire with confidence.

[i] https://www.rand.org/pubs/working_papers/WR196-2.html