Will Working in Retirement Actually Cost You Money?

Some workers get the bright idea to claim Social Security at age 62 and simultaneously switch to a part-time working schedule, figuring that the combination of part-time wages and Social Security benefits will be enough to keep them afloat. Unfortunately, this strategy can run up against the Social Security earnings limit and leave these workers short on funds as a result.

How the earnings limit works

If you start getting Social Security benefits before hitting your official full retirement age, you'll be subject to the earnings limit rule. Basically, any earnings you make that exceed the earnings limit for the year will reduce your Social Security benefits checks by one dollar for every two dollars you're over the limit. During the year that you're going to reach full retirement age, Social Security will deduct one dollar from your Social Security benefits for every three dollars that you earn over the annual limit; once you actually hit full retirement age, the earnings limit disappears. For 2017, the Social Security earnings limit is $16,920 a year.

A cautionary tale

As an example, consider imaginary retiree Bob, who decides to claim his Social Security benefits on January 1 of his 62nd year. He continues to work for his employer, but cuts his schedule back to 15 hours a week, and as a result he now receives a paycheck of $2,000 per month. That means he'll be making $24,000 during the year, which exceeds the Social Security earnings limit by $7,080. His Social Security benefits will be reduced by half that, or $3,540. Because of his earnings record, Bob would normally qualify to receive $1,000 per month in Social Security benefits. However, due to his excessive earnings this year, he will receive no Social Security benefits for the first three months of the year and in month four he will receive a benefits check of just $460. For the rest of the year, Bob will receive his normal Social Security benefits of $1,000 per month. If Bob was counting on those Social Security benefits for income, he's going to be mighty short on funds during his first few months.

The good news about earnings

There is a silver lining to this cloud: for every month that you don't receive Social Security benefits because of excessive earnings, your future benefits will be increased. Claiming Social Security before hitting full retirement age causes your benefits to be reduced by the early retirement penalty amount. But if there are months during that period when you don't receive benefits because of your earnings, Social Security removes those months from the early retirement penalty calculation. In Bob's case, once he hits full retirement age, his benefits will be recalculated as though he had started claiming Social Security about three and a half months later than he actually did.

What counts toward the earnings limit?

Not all income qualifies as earnings as far as Social Security is concerned. Wages, income from self-employment, bonuses, commissions, and vacation pay all count toward the annual earnings limit. Pensions, annuities, interest, investment income such as dividends, and government and military retirement benefits do not count as earnings. Social Security calculates your benefits based on the amount you report that you will earn during the year, but if it turns out the you actually earned more or less than the amount you reported, it will adjust your benefits checks accordingly.

What to do about it

If you're thinking about retiring early and working part time, check first to see what the Social Security earnings limit is for the year and do the math to see if you'll exceed that level. If so, you may be better off waiting until you reach full retirement age to claim Social Security. Another option is to juggle your work schedule until your annual earnings will come in just under the limit for the year. That would allow you to maximize your income from wages and Social Security benefits, and you can combine this income with distributions from your retirement accounts. However, before you follow this course of action, check to make sure that you won't need to draw too much out of savings and thereby deplete your capital. Otherwise, your early retirement could turn out to be far more expensive than you expected.

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