How Will Working Affect Social Security Benefits?

By Ken Earwood

In a recent survey, 67% 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?

To answer 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 until age 70½.

“Full retirement age” is the age at which individuals become eligible to receive 100% of their Social Security benefits. For example, individuals born in 1955 can receive 100% of their benefits at age 66 years and 2 months.²

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 2015, the income limit is $15,720.³

how-will-workingDuring 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 2015, the limit is $41,880. ⁴

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, the worker earns $65,000. The Social Security benefit would be reduced as follows:

Earnings above annual limit
$65,000 – $41,880 = $23,120
One-third excess
$23,120 ÷ 3 = $7,707

In this case, the worker’s annual Social Security benefit would have been reduced by $7,707 because he or she is 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.

There are many factors to consider when evaluating Social Security benefits. Understanding how working may affect total benefits can help you put together a program that allows you to make the most of all your retirement income sources—including Social Security.

1. Employee Benefit Research Institute, 2015
2,3,4. Social Security Administration, 2015

Ken Earwood is a professional financial advisor with more than 20 years of experience serving clients in the financial service industry. CA Lic. #: OC44710. He can be reached at 16531 Bolsa Chica St. Ste. 250 in Huntington Beach, CA 92649. or call (714) 840-9283, ext. 2. Securities offered through Parkland Securities, LLC. Member FINRA/SIPC.

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