The Ultimate Guide to Working While Collecting Social Security - Root Financial

Reaching the age of 62 marks a significant milestone for many individuals. After years of working hard and contributing to the Social Security system, it’s only natural to start thinking about collecting your benefits and getting back what you’ve invested. But what happens if you continue working while collecting Social Security benefits? This topic can be confusing, and misinformation abounds. In this post, we’ll clear up the confusion and provide you with everything you need to know about working and collecting Social Security benefits.

Understanding the Earnings Limit:

One of the first things you need to be aware of if you plan to work while collecting Social Security benefits is the earnings limit. In 2023, if you are under your full retirement age (typically between 66 and 67), the earnings limit is $21,240. This means that if you earn more than this limit while also collecting Social Security, the Social Security Administration will start to withhold some of your benefits.

Here’s how it works: for every $2 you earn above the earnings limit, Social Security will withhold $1 from your benefits. It’s crucial to stay below this limit if you want to avoid having your benefits reduced.

What Counts as Earnings?

When it comes to the earnings limit, not all types of income are considered. Only your wages count towards this calculation, specifically the income you personally earn from working. Other sources of income like dividends, pensions, or rental income do not count as earnings for this purpose. Even if your spouse is still working and earning a substantial income, their earnings do not affect your earnings limit.

Example: Let’s say your Social Security benefit is supposed to be $1,500 per month, but you earn $27,240 per year, and you’re 62 years old. Since you’ve exceeded the earnings limit by $6,000, Social Security will withhold half of that, which is $3,000, or $250 per month. Instead of receiving $1,500, you’ll receive $1,250 per month.

Earnings Limit at Full Retirement Age:

The earnings limit changes when you reach your full retirement age. In 2023, the earnings limit at full retirement age is $56,520. If you earn more than this limit, the same rule applies: for every $2 above the limit, Social Security will withhold $1 in benefits. It’s important to keep track of these limits as they can impact your benefits.

Earnings Before Collecting Social Security:

If you plan to retire and collect Social Security benefits at full retirement age, the earnings you had before your full retirement age birthday do not count towards the earnings limit. Only the income you earn after you start collecting benefits is considered. This means you can earn as much as you want before collecting without affecting your benefits.

How Social Security Tracks Your Earnings:

Social Security doesn’t communicate with your employer every pay period to determine your earnings. Instead, when you apply for Social Security benefits, you’ll be asked what you expect to earn in that year. Based on your response, Social Security will calculate how much they need to withhold from your benefits. At the end of each year, they’ll reconcile your reported earnings with what was actually withheld, and adjustments may be made.

Options for Adjusting Benefits:

If you start collecting Social Security but later decide to go back to work or if your plans change, you have a couple of options. If you’re under full retirement age and it’s been 12 months or less since you started collecting benefits, you can withdraw your benefits. You’ll need to repay what you’ve collected, but it’s as if you never started collecting at all.

If you’re full retirement age or older, you can choose to suspend your benefits. This allows you to stop collecting without repaying anything, and your benefit will continue to grow by 8% per year plus any cost-of-living adjustments until you decide to collect again.

Recalibrating Benefits:

If your benefits were withheld due to the earnings limit, Social Security recalibrates your benefits when you reach full retirement age. They will adjust your benefit amount as if you had collected fewer months early. This means your benefits will be less reduced when you start collecting again.

Navigating the intricacies of working and collecting Social Security benefits can be complex, but with the right knowledge, you can make informed decisions that maximize your financial well-being in retirement. Understanding the earnings limit, what counts as earnings, and your options for adjusting benefits is essential. Social Security is designed to provide financial security in retirement, and with careful planning, you can make the most of this valuable resource.

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