By Steve Tepper, CFP®, MBA
I wonder if the folks over at the Social Security Administration (SSA) think they’re being clever. They make the rules so complicated and convoluted, it’s no wonder every retiree doesn’t make at least one big mistake and end up with less retirement income than they’re entitled to.
In this article, I’m looking at one small aspect of Social Security’s retirement benefits: the potential impact of job income on your Social Security check if you continue to work after you elect to begin receiving benefits.
Let’s start with the easy part: Once you reach “full retirement age,” you can begin taking benefits without any impact on the amount if you are still working. But what is full retirement age? Oops, I guess this part isn’t so easy.
The SSA defines three different ages associated with retirement benefits: early retirement age (currently 62), maximum benefit age (currently 70), and full retirement age. Full retirement age is not the same for everyone. It depends on when you were born. For example, if you were born before 1955, your full retirement age is 66. If your date of birth is after 1959, full retirement age is 67. For the years in between (1955-1959), your full retirement age is somewhere between 66 and 67.
Now back to our story already in progress. If you wait until your full retirement age to begin taking retirement benefits, you will get the full amount to which you are entitled, whether you keep working or not. But if you start taking benefits after age 62 but before full retirement age, your benefit may be reduced.
The SSA allows you to earn some income before the benefits reduction kicks in. For 2022, that limit is $19,560. The limit increases to $21,240 in 2023. If you earn more than the limit in a given year, your benefit will be reduced by $1 for every $2 you earn in excess of the limit.
For example, if your retirement benefit is $2,000 per month, but your income in 2022 is $20,560, you have exceeded the limit by $1,000. So your monthly benefit will be reduced by $500.
But you still get $1,500 a month, right? Nope! The SSA collects all the reduction up front. In this example, the total reduction is $500 times 12 months, or $6,000 for the year. So you get $0 for the first 3 months, then your full $2,000 per month for the rest of the year.
While the benefit reduction ends after you reach full retirement age, it still applies the year you reach full retirement. In that year, your benefit will be reduced by $1 for every $3 earned above the limit. The income limit in that year is much higher: $51,960 in 2022 and $56,520 in 2023.
The good news is all those reductions are not lost. Once you reach full retirement age, they will be returned to you in the form of a slightly higher benefit paid out over time.
But hold on a second. If the reduction is based on whether you exceed the earnings limit, how will the SSA know how much you make to determine if your benefit should be reduced? Won’t it be too late if they wait until the next year when you do your taxes? The answer is they don’t know, and yes, it will be too late next year. You are responsible for reporting to the SSA that you are earning in excess of the limit. If you don’t, you could be fined, be forced to pay back the excess you received, and may even have future benefits reduced.
At the end of the day, if you keep working after you begin taking retirement benefits and properly follow all the rules, any Social Security income lost will be paid back to you (albeit over a longer period). That makes it very important that you follow all the rules! Know your full retirement age, contact the SSA if you are going to exceed the earnings limit for the year, and talk to your financial advisor if you need to know more.