We may have an idealized vision of retirement in our heads: days spent golfing, traveling, and enjoying the company of friends and family. But unfortunately for many of us, retirement may not be nearly so carefree. Working part-time after retiring is one way that many retirees are supplementing their retirement income and fighting the potential ennui of no longer having a self-defining career.
However, working part-time during retirement can affect your Social Security benefits. Here’s what you need to know about Social Security’s rules and limits if you continue drawing a paycheck after applying for benefits:
There are many great reasons to wait for Social Security’s full retirement age of 66, and the effects of part-time income on your benefits is one of them. If you begin drawing benefits as soon as you’re eligible (at age 62), not only will you be receiving reduced benefits based on how many months you are from full retirement age, but you’ll also see a reduction in benefits based on your part-time income.
In particular, those retirees working part-time who are younger than 66 will see $1 deducted from their benefits for each $2 they earn over the current limit of $15,120. (That income limit is the case for 2013, and the amount is re-adjusted each year for inflation).
What’s more, Social Security does not simply reduce your monthly benefits throughout the year if you’re working part-time. Instead, your benefits will be completely withheld until you’ve reached the full benefit reduction amount. What this means is that you could go half the year with no Social Security benefits, but you’ll receive your full benefits for the second half of the year.
If, however, you begin drawing benefits during the same year that you reach full retirement age, the part-time income limit is higher ($40,080 for 2013) and the amount your benefits are reduced is lower — $1 for every $3 you earn above that amount. In addition, you’ll only see a reduction in benefits until you reach your full retirement age, at which point you can keep all of your benefits, no matter how much you’re earning.
Return of Withheld Benefits
On the plus side, however, the benefits that were withheld while you were working part-time before age 66 aren’t gone forever. According to the Social Security Administration, “If some of your retirement benefits are withheld because of your earnings, your benefits will be increased starting at your full retirement age to take into account those months in which benefits were withheld.”
So it’s important to remember that if you have to take benefits early while still bringing in a paycheck, you can still see your full benefits when you’re ready to more fully retire at age 66 or older.
Of course, working during retirement can also cause some added tax complications. Social Security benefits are taxable if you and your spouse have a combined income greater than $32,000. Taxpayers filing jointly who are eligible for Social Security will have to pay taxes on 50% of their benefits if they earn between $32,000 and $44,000 per year. Above $44,000 per year in earnings, and the couple will have to pay taxes on up to 85% of their Social Security benefits.
The Bottom Line
Working part-time in retirement can be a great way to stretch out your retirement savings and keep a hand in your career. But, when doing your retirement planning, it’s important to know how continuing to work can affect your benefits.
Are you planning on working part-time after you retire?
Editor's Note: I've begun tracking my assets through Personal Capital. I'm only using the free service so far and I no longer have to log into all the different accounts just to pull the numbers. And with a single screen showing all my assets, it's much easier to figure out when I need to rebalance or where I stand on the path to financial independence.
They developed this pretty nifty 401K Fee Analyzer that will show you whether you are paying too much in fees, as well as an Investment Checkup tool to help determine whether your asset allocation fits your risk profile. The platform literally takes a few minutes to sign up and it's free to use by following this link here. For those trying to build wealth, Personal Capital is worth a look.