In a recent survey, 70% of current workers stated they plan to work for pay after retiring.1
And that possibility raises an interesting question: how will working affect Social Security benefits?
The answer to that question requires an understanding of three key concepts: full retirement age, the earnings test, and taxable benefits.
Full Retirement Age
Most workers don’t face an “official” retirement date, according to the Social Security Administration. The Social Security program allows workers to start receiving benefits as soon as they reach age 62 – or to put off receiving benefits up until age 70.2
“Full retirement age” is the age at which individuals become eligible to receive 100% of their Social Security benefits. Individuals born in 1960 or later can receive 100% of their benefits at age 67.
Earnings Test
Starting Social Security benefits before reaching full retirement age brings into play the earnings test.
If a working individual starts receiving Social Security payments before full retirement age, the Social Security Administration will deduct $1 in benefits for each $2 that person earns above an annual limit. In 2023, the income limit is $21,240.3
During the year in which a worker reaches full retirement age, Social Security benefit reduction falls to $1 in benefits for every $3 in earnings. For 2023, the limit is $56,520 before the month the worker reaches full retirement age.3
For example, let’s assume a worker begins receiving Social Security benefits during the year he or she reaches full retirement age. In that year, before the month the worker reaches full retirement age, the worker earns $65,000. The Social Security benefit would be reduced as follows:
Earnings above annual limit | $65,000 – $56,520 = $8,480 |
One-third excess | $8,480 ÷ 3 = $2,827 |
In this case, the worker's annual Social Security benefit would have been reduced by $2,827 because they are continuing to work.
Taxable Benefits
Once you reach full retirement age, Social Security benefits will not be reduced no matter how much you earn. However, Social Security benefits are taxable.
For example, say you file a joint return, and you and your spouse are past the full retirement age. In the joint return, you report a combined income of between $32,000 and $44,000. You may have to pay income tax on as much as 50% of your benefits. If your combined income is more than $44,000, as much as 85% of your benefits may be subject to income taxes.4
Analyzing Benefits as Part of a Financial Plan
There are many factors to consider when evaluating Social Security benefits. Understanding how working may affect total benefits can help you put together a strategy that allows you to make the most of all your retirement income sources – including Social Security.
When conducting retirement analysis as part of financial planning, reviewing social security benefits can help you to understand its impact on your plan. Through the Decision Center in eMoney, our Certified Financial Planner™ professionals can create a Social Security Comparison Report, illustrating different outcomes for different situations.
Illustrating Your Choices
There are multiple factors that impact the size of your social security check. Our CFP® Professionals leverage eMoney technology to deliver a financial plan to clients. For clients that have retirement planning needs, our CFP® Professionals can create a Social Security Comparison report, providing clients with details needed to make a more informed decision.
After our CFP® Professionals create a Social Security Comparison Report, they sit down with clients and highlight the potential benefits of different claiming strategies or ages. Fig 3 shows receiving at 65 vs delaying to age 70 and the spouse taking a restricted spousal claim. The chart shows the temporary decrease in assets and then the significant increase over time.
Reach out to your RMR advisor and ask for more information on developing a Social Security Comparison report as part of your financial plan. Don’t have an RMR Advisor? Send us a message asking how we can help and an advisor will reach out to you.
You can also use our goal planner projection to gauge if you are on track to meet a major goal, like retirement.
The chart above, including any illustrations, projections, numbers, and details, is intended to be used as an example only. It is not intended to be used as advice and is not specific to any financial situation. Your financial situation is unique. Please reach out to one of our advisors to create a financial plan for your unique situation. The social security administration will have the most accurate information on your social security benefits. Log into your account via www.ssa.gov.
- EBRI.org, 2022
2. SSA.gov, 2023
3. SSA.gov, 2023
4. SSA.gov, 2023
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright FMG Suite.