The number of people working into their 70s and even 80s has been steadily rising over the years. While some of that comes from income needs, most arise from a need for additional fulfillment and a new adventure in retirement.
Research from AARP suggests that while workers over 75 aren’t the new normal, it is trending in that direction. The Bureau of Labor Statistics predicts that retirees will be the fastest-growing segment of the workforce citing that those working people ages 65-74 will reach about 32% in 2022. That is up from 20% in 2002, a 12% boost in just a decade.
With retirees finding new passions in the workforce, what does this mean for their Social Security benefits? As you know, Social Security is considered a big source of retirement income, but are benefits reduced if you continue to work? Let’s find out.
Timing matters
Collecting Social Security benefits is a big determinant of your current and future monthly income. While most people are eligible to collect benefits as early as 62, there is no stipulation that says you have to stop working. You can collect Social Security benefits and keep your current job or start a new one.
Remember, by collecting early (or any time before your full retirement age) you will see a reduction in your benefits. Collecting as early as 62, your benefits will see about a 30% reduction if your full retirement age is 67. This has important consequences for your retirement budget and income strategy.
But what if you collect early and are still working?
Social Security may not dictate whether or not you can work and collect benefits, but they can issue a penalty if you make over a certain threshold before full retirement age.
Breaking down full retirement age
Your full retirement age plays a crucial role in social security benefits. By waiting to collect until you reach full retirement, you are eligible for 100% of your primary insurance amount (PMI). Your PMI is the number that the Social Security Administration gets by indexing your 35 highest-earning years with their unique system.
What is your full retirement age? For most people, it will be anywhere from 66 or 67. For those born in 1960 or later, it is 67. Find your exact full retirement age here.
Waiting until your full retirement age to begin Social Security has many benefits including an increase in your monthly benefit, better cash-flow, more flexibility in your retirement budget, and no limits on earned income. That’s right, if you collect benefits before full retirement age, you are subject to an income cap. Exceed that threshold and you will see a further reduction in your monthly payment. Let’s take a closer look at what those income limits are.
Collecting early and still working?
While you can collect social security and still work, if your earnings exceed the annual limit and you are below your full retirement age, you will see a drop in your monthly income. For 2020, retirees who are below full retirement age can make $18,240 per year before benefits are reduced. If your income goes beyond that limit, Social Security will reduce your benefit $1 for every $2 you make above the limit.
In the year that you reach full retirement age, those restrictions loosen to $1 for every $3 that you earn above the limit. This reduction only applies in the months leading up to your full retirement age. Once you reach that age your benefit will no longer be reduced. Let’s use an example to demonstrate.
Andy’s full retirement age is 67 and he was born on May 15th. He started collecting benefits at age 65 when he left his job and began working part-time at the local wine shop. Between tips and commissions, Andy made about $20,000 in his first couple of years working in the wine store. Since his earnings were above the $18,240 limit, Andy’s social security benefit was reduced $1 for every $2 earned.
But in the year that Andy reaches full retirement age, from January to May, that reduction will lessen to $1 for every $3 earned up until May 15. Once he reaches his full retirement age his benefit is no longer reduced.
Full retirement age is really the key to a strong social security plan. By waiting at least until then, you will be able to avoid a permanent reduction in benefits as well as avoid an income cap.
How working fits into your retirement plan
A key component of a successful retirement plan is finding purpose and fulfillment in how you spend your time. For many retirees, that comes in the form of a part-time job, encore career, volunteer efforts, chairing boards or other events, and other work they find value and meaning in.
If work is going to be part of your retirement, a financial advisor can help design a retirement income plan that combines earned income, pension funds, required minimum distributions, withdrawal strategies, and of course Social Security benefits. Goepper Burkhardt loves helping people make the most of their retirement plan and that comes from our comprehensive approach. Get in touch with our team today.