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Social Security and Optional Working

At Walkner Condon, one of the common phrases in our conversations with clients is that of the “work optional lifestyle.” There are two parts to this idea: the first is that we want our clients to be in a position to be able to make a decision to stop working, rather than be required to work.  More importantly, we want our clients to feel liberated to keep working in the ways that are important to them: we know that many of our clients find their work stimulating or continue to be experts in their field and know that they can continue to share that information through consulting projects, short-term contracts, speaking engagements, etc. While these are beneficial options, they do change some of the calculus for retirees and their finances particularly in regards to social security.  

There are two key ways that earnings from employment can affect your social security benefits: benefit reduction and taxes. Benefit reduction takes place if you return to the workforce before reaching your full retirement age (FRA, see here to determine your FRA) and are already collecting Social Security (income from investments or pensions will not reduce your benefits).  If you are below FRA and it is neither your first year of retirement nor are you reaching full retirement age that year, the Social Security Administration has an income limit of $17,640 and will reduce your benefits by one dollar for every two dollars over that limit you earn. For example, if you are collecting $1,000 in monthly benefits and earn $27,640, your benefits exceed the limit by $10,000 which means they will be reduced by $5,000 annually or $416.66/month. If you earn all of that money before you begin collecting social security, your benefits won’t be reduced. Moreover, if you are reaching Full Retirement Age that year, the maximum goes up to $46,920 for those months before Full Retirement Age and 1 dollar is reduced from every 3 dollars exceeding the limit. 

Note that these reductions will be returned to you once you hit Full Retirement Age (though not as a lump sum).

The other case whereby working can affect your benefits is in terms of taxation.

Social security is taxed as follows (if you earn income below these amounts, social security is not taxed):

  • single filers with a combined income (including pensions and investments) of $25,000 to $34,000 pay income taxes on up to 50% of their Social Security benefits; above $34,000, you pay taxes on 85% of your benefits

  •  married couples filing jointly pay taxes on up to 50% of Social Security income if you have a combined income of $32,000 to $44,000 (including pensions and investment); above $44,000,  85% of your Social Security benefits are taxed

These are not marginal tax rate increases, so the net effect on your taxes paid could be more substantial-- to the point that Investopedia has called it a “tax trap.” 

There are a couple of options for adjusting Social Security, if you are thinking about returning to work, but only in limited situations: 

  • If you have returned to a job that you think you’ll be keeping for several years and have been retired for less than a year, you may elect to pay back your benefits and basically “reset” your social security.

  • If you have reached full retirement age (this is not an available option), the other option is to “suspend” your social security benefits.  This can be useful if you don’t need your social security to live on, especially as a suspension of benefits means that everyone drawing benefits from your account (spouse or children) will see their benefits suspended as well.  However, suspending between FRA and age 70 will mean that your benefits will increase by about 8% per year.  

Once you’ve hit age 70, you’re sort of stuck, however, as you can’t increase your benefits anymore… 

If you are presented with a “work optional” option and are collecting social security, it is a good idea to check in with your financial advisor to make sure that you are most efficiently handling your benefits.