Working in retirement may sound like a good idea.
Start collecting Social Security. Get a part-time job you enjoy. And earn some extra spending money to have more fun in your golden years.
We asked financial planning experts their take on working while collecting Social Security, and they gave us the scoop on how to go about it. (Hint: It’s actually a good idea to work, but only if you plan properly.)
These financial planning experts share with us six ways that working while on Social Security can affect your benefits.
Potential for Withheld Benefits
To receive your full Social Security benefit, you must not earn too much (taxable) income on the side.
Ted Erhart, CFP and founder of Norris Lake Retirement Planning, cautions workers to consider this. “If [you are] under full retirement age, working can result in withheld benefits if income exceeds the earnings limit.”
It’s important to plan your working income in conjunction with your Social Security benefits to make sure you’re not missing out.
Joseph A. Carbone Jr., CFP and founder of Focus Planning Group, encourages retirees to review the earnings test each year.
“One of the critical factors in determining when to file for Social Security benefits is the earnings test,” Carbone said. “The earnings test only applies to filers yet to reach full retirement age (FRA). Suppose you are still working/earning income and filing to receive benefits years before reaching your FRA. Your benefits will be reduced. Social Security will deduct $1 from every $2 you earn above the annual limit of $21,240 for 2023 and $22,230 in 2024.”
Potentially Higher Taxes
Taxes are tricky in retirement, and working while you are collecting Social Security benefits might be detrimental to your taxes.
“Regardless of age, working while drawing Social Security can result in some or up to 85% of benefits becoming taxable,” Erhart said.
Here are a few example from Erhart’s website about how various income levels affect taxation:
- If you are Married Filing Jointly, your combined Social Security benefits are $40,000 and your only other income is a $24,000 annual pension, approximately 15% of your Social Security benefits will be taxable.
- If your Social Security benefits are $30,000 and your only other income is a $24,000 annual pension, approximately 29% of your Social Security benefits will be taxable.
As with any tax estimations, your taxable income will vary, and it’s recommended to work with a licensed tax professional.
You Might Increase Your Benefit
While you can decrease your benefit from working too much while collecting Social Security, there’s a potential upside. If you don’t have a full 35-year earnings history, you can potentially increase your benefit.
“If you’re someone with less than 35 years of earnings history,” Erhart said, “you may actually increase your benefit by knocking some of the zero earnings years out.”
More Capital Gains Taxes
In addition to a potential reduced benefit, working in retirement can possibly lower your ability to collect 0% capital gains, causing you to pay more in taxes.
“One other potential negative is if you’re someone who has unrealized gains in a non-retirement account,” Erhart said. “If your only source of income is Social Security, you’ll have lots of opportunities to take gains at a 0% long-term capital gains rate. If you start layering on additional income from working, not only will you increase the amount of Social Security subject to taxes, but you’ll crowd out your ability to capture the coveted 0% long-term capital gains rate.”
It May Reduce Roth Conversion Savings
Mike Hunsberger, ChFC, CFP and owner of Next Mission Financial Planning, utilizes Roth conversions to help save on taxes for clients. But working while claiming Social Security might reduce what you can save with this strategy.
“If you’ve shifted to part-time work and still have a large traditional 401(k) or IRA, claiming Social Security will reduce the amount of Roth conversions in the lower tax brackets,” Hunsberger said. “Social Security benefits would offset an additional dollar of conversion within the given marginal tax bracket. When looking at traditional 401(k) or IRA conversions to Roth accounts, it can make sense to defer Social Security claiming.”
In addition to the financial impacts of working during retirement, there are some non-financial benefits to consider.
Amar Shah, CFA, CFP and founder of Client First Capital, actually encourages retirees to work, if desired.
“There are many other non-financial benefits from working while receiving Social Security that many individuals don’t consider,” Shah said. “Some of the benefits include structure to the day, social interactions/relationships, critical thinking and decision making.
“Even if you focused solely on the financials after paying more taxes and potentially impacting your Medicare payments, you will still net out to be ahead. We advise all clients that if there is any desire to work they should pursue it for the many benefits that improve the quality of life in the later years.”
Working during retirement can impact your Social Security benefits. But if you carefully consider the financial and tax impact, it can actually be a good thing to keep working.
In addition for the potential to increase your benefit, having a job can actually improve quality of life for retirees, giving them something to look forward to. But make sure to meet with a financial planner and tax professional before making any moves in retirement.
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