Preparing for retirement is never easy, but as costs continue to rise, it's only getting more difficult to save enough to live comfortably.
To combat this, many older adults are choosing to work longer. Roughly half of baby boomers say they expect to continue working past age 70, and around 83% of that group say they're doing so for financial reasons.
Image source: Getty Images.
You can continue working after taking Social Security, and in some cases, that can be a smart move. Having an extra source of income can make retirement more affordable, and it could allow you to work only part-time rather than full-time.
That said, working while on Social Security can sometimes reduce your benefit amount -- sometimes by several hundred dollars per month. Here's everything you need to know about how your income will affect your benefits, as well as how to calculate your own potential reduction.
How working affects Social Security
If you're earning income from a job after you begin claiming benefits, your wages may be subject to the retirement earnings test. This is essentially an income limit that determines how much, if any, of your benefits will be withheld because of your earnings.
First, it's important to keep in mind that this will only affect you if you're under your full retirement age (FRA). Your FRA will depend on your birth year, but it's age 67 for anyone born in 1960 or later.
Image source: The Motley Fool.
There are two different limits depending on whether you will or will not reach your FRA in 2024. Also, these limits change from year to year to account for inflation, so if you're not taking benefits just yet, these numbers may be slightly different by the time they affect you.
| Annual Income Limit | Benefit Reduction | |
|---|---|---|
| If you will reach your FRA in 2024 | $59,520 | $1 reduction for every $3 over the limit |
| If you won't reach your FRA in 2024 | $22,320 | $1 reduction for every $2 over the limit |
Source: Social Security Administration. Table by author.
So, for example, say you're 65 years old with an FRA of 67, and you're earning $30,000 per year from your job. You won't reach your FRA in 2024, so you're subject to the $22,320 annual limit. Your income is $7,680 over that limit, which means your benefits will be reduced by $3,840 per year -- or $320 per month.
The good news for retired workers
Fortunately, these income limits only affect those under FRA. Once you reach your FRA, the Social Security Administration will recalculate your benefit amount to account for the money that was withheld, and you'll start receiving larger payments.
It can be wise, then, to estimate how much your benefits might be reduced based on your income before you begin claiming. If you know that your monthly payments will be slashed significantly, you could be better off delaying claiming until at least your FRA. After all, there's little point in claiming early if most of your benefit will be withheld anyway.
That said, sometimes claiming early and taking the reduction is still a good move. For example, perhaps you lose your job and are forced to take part-time work, but that's not enough to cover all your expenses. In that case, claiming benefits early can help make ends meet, even if your income results in a temporary benefit reduction.
Everyone's situation will be slightly different, but the more planning you can put into retirement, the better. By understanding how your income will affect your benefit amount, you can make the best decisions for your unique situation.
