How Work Can (Temporarily) Reduce Your Social Security Check

Here’s the scenario: You retired last fall at age 63 with great expectations of all the new things you would be able to do with your free time. Except that learning jazz piano has proven more challenging than you thought, your spouse can’t stand the mess you make in the kitchen trying to re-create the recipes you learned in that pastry-making class and you’re so hooked on flash sales you’re on a first-name basis with the UPS guy.

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Admit it: You miss working. Leaving the labor market is hard.

You miss the intellectual challenge, the camaraderie you had with your co-workers and the feeling of being valued. If you were in management, you might even miss bossing people around- something you don’t dare try to do to your spouse.

Making the transition from full-time employment to retirement can be traumatic. It entails a major emotional and psychological adjustment, not to mention a financial one. In short, it takes planning and preparation.

So, with your spouse’s blessing (insistence?), when your former boss calls and asks if you’d like to come back on a part-time basis, you jump at the chance.

There’s only one hitch: You already started receiving Social Security. Should you stop it? (Technically, this is called “withdrawing” your application for benefits and is an option only if you have received benefits for less than 12 months.) Telling Social Security to stop sending monthly checks would require paying back (without interest) all of the benefits you’ve already received. Although this would enable you to re-file at a later date and get a larger check (because you’d be older), you don’t have that kind of money hanging around. Plus, you’re not sure how long the part-time gig with your former employer is going to last.

So you decide to continue receiving Social Security and cheerfully head back to work on special projects and putting in about 15 hours a week.

Everything is honky-dory until you get a letter from the folks at Social Security (most likely after you file your 2014 tax return) telling you that you exceeded this year’s “earnings limit” and, as a result, they overpaid you. The administration is now withholding all benefits in 2015 until this amount is recovered, and it wants to know if you plan to work next year as well because depending upon how much you earn, it may have to withhold some of your benefits again.

What the heck?! Didn’t you earn that benefit? Isn’t that why you had FICA tax withheld from your paychecks for the 42 years you worked? What’s the point in working to earn extra money if you’re going to lose your Social Security benefit? You might as well sit in your recliner and watch Three Stooges reruns.

Hold on.

Yes, there is something called an “earnings limit” that may require that Social Security withhold some- or all- of your benefits. But you don’t “lose” the money. And, working while you are getting Social Security could mean a bigger check down the road.

Here’s how it works:

It’s the Law (Blame Congress, not Social Security.)

Social Security cannot pay you your full benefit if you are under “full retirement age” (FRA) and your income from a job exceeds a certain amount. Interest on bank accounts or bonds, dividends from stocks and income from retirement accounts, pensions, or military retirement benefits is not counted- just earned income.

There are two different earnings limits,

If you are not reaching FRA this year the 2014 earnings limit is $15,480. (This is adjusted for inflation annually.) For every $2 you earn above this amount, Social Security is required to withhold $1 in benefits. Thus, if your gross earnings from a job are $20,000, your annual benefit will be reduced by $2,260. ($20,000-$15,480= $4,520/2= $2,260.)

If 2014 happens to be the year you are turning 66, there is a different- and substantially higher- earnings limit. Only the months before the one in which you turn 66 are considered. During this period, you can earn up to $41,400 and have no reduction in your Social Security benefit. For every $3 in earned income above this amount, your benefits will be reduced by $1.

The month you reach FRA the earnings limit test disappears. At this point, no matter how much you earn from a job, it will have no impact on the size of your monthly check. (Aren’t you relieved to know that 83-year old Warren Buffett is receiving his full Social Security benefit?)

The “Special” Rule

Even if your earnings for the year exceed the annual limit, you might still be able avoid having your monthly Social Security benefit reduced. This depends upon the amount you earned in a month and whether you were what Social Security calls “substantially” self-employed. The dollar amounts differ depending upon whether you are under or turning full retirement age this year.

You Don’t “Lose” the Money

Income that Social Security withholds because your earnings exceed the limit gets credited to your account. At FRA, your benefit will be adjusted higher to reflect this.

You Can’t Hurt Yourself by Continuing to Work

The size of your Social Security benefit is based on your 35 highest years of inflation-adjusted earnings. Even if you are already receiving Social Security, for each additional year you work, your record will be evaluated to see if a lower year of earnings should be dropped in favor of your most recent earnings. This will also increase your benefit.

Social Security is a unique and valuable retirement benefit. You essentially get one shot at choosing when and how to begin receiving it. I strongly recommend you think this through carefully and consider getting advice. If you are married, it is essential that you coordinate your benefits so that you can maximize the joint income you receive as a couple.

Your Social Security decision will literally affect the amount of income you receive for the rest of your life.

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