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Questions to Ask If You’re Considering Working During Retirement

by Chris Jaccard, CFP®, CFA on 9/10/2018

Ask yourself several important questions about the benefit and tax implications of taking Social Security benefits while working.

One of the best ways that modern retirement has changed for the better is the high amount of retirees embracing the decision to stay active. Whether you’re working full time, part time, or pursuing your own dream business or an “encore career”, it should be factored in to your Social Security strategy. Read this article to learn about the benefit and tax implications of taking Social Security benefits while working.

Reduction in Cash Benefits

If you have claimed Social Security and reached your full retirement age (between 65 and 67 years of age depending on your year of birth) you can earn as much as you want and keep all your Social Security benefits.

However, if you claimed benefits before your full retirement age, your benefit could possibly be reduced.  For example, if you claimed early and earned income in 2018, the Social Security benefit paid to you is reduced $1 for every $2 you earn over $17,040.  If you realize you made a mistake in claiming early, you have a once in a lifetime opportunity to pay back what you took and reset the clock – but it must be made within one year of claiming benefits.

Read: A deeper look at Social Security Claiming Strategies

This reduction due to early claiming is not a permanent loss, as the Social Security Administration (SSA) will make a recalculation and add back the withheld benefits when you reach full retirement age.  Still, it may have a large impact on your cash flow and hence spending ability.

Questions to ask yourself:

  • What, if any, is the reduction on every dollar earned now that I am combining SS and income from my work?
  • How much can I work and still get benefits? (only relevant if claimed SS prior to full retirement age)
  • Am I within the one year window period of redacting my SS claim?

In many cases, we encourage clients to delay taking their Social Security benefits even if they’ve reached full retirement age.  Much of this is, of course, because the benefit increases roughly 8% for each year of deferral.

Income Taxes “Kinks”

Taxes. Even in retirement the IRS doesn’t leave us alone. And interesting enough, in retirement your tax situation may be complicated by a decision to work after having claimed SS.

Uncle Sam can tax up to 85% of your Social Security benefits, and there are two “kinks” in the calculation for middle income households:

  • One where the amount taxed goes from 0% to 50%
  • Another one where the amount taxed goes from 50% to 85%.

The amount of income at which the tax “kink” is triggered varies if you are single or filing jointly as a couple. This article from Fidelity Investments provides more detail.

Because of this, middle income households who have decided to return to work after claiming social security could end up paying at marginal tax rates reserved for the highest earners in the country!

Higher income households collecting Social Security benefits must be aware of Medicare surcharges.  Joint tax filers with income over $170,000 begin paying surcharges of roughly $50, but this grows to over $290 per month at higher levels of income (as of 2018).

Read: More information on Medicare Part B costs

Questions to ask yourself:

  • At what level of income does my tax burden escalate and is it still worthwhile to participate in work at that point given that circumstance?
  • How are my Medicare premiums being impacted by my income level?

Takeaways for Those Working After Claiming SS Benefits

If you are claiming Social Security benefits early, take the time to consider the full impact of that choice. If you work after claiming benefits, consider how the reductions will impact your cash flow. Consider other claiming strategies to manage your income and cash flow, including a spousal strategy, suspending your benefit, or a do-over. Consider delaying Social Security benefits, and use withdrawals from a brokerage, IRA, 401K or other account to supplement your income.

Other than these claiming techniques, there are strategic moves that can be made using certain financial vehicles. As long as you are earning income, you are still eligible to contribute to an IRA or 401K – and HSA if under age 65.  These strategies could lower the tax hit and improve your standard of living over your lifetime.

If you’re coming up with a blank after asking yourself these questions, it may be a good idea to discuss your personal situation with an advisor. Contact us for more information.

Sources:

Fidelity. 17 August, 2018. Fidelity Viewpoints: Taxes on Social Security: 2 ways to save.  Retrieved from https://www.fidelity.com/viewpoints/retirement/taxes-on-social-security

Medicare.gov. (n.d.) Part B costs. Retrieved from https://www.medicare.gov/your-medicare-costs/part-b-costs/part-b-costs.html.

Richenstein, William, PhD, and Meyer, William. Understanding the Tax Torpedo and Its Implications for Various Retirees. Journal of Financial Planning. Retrieved from https://www.onefpa.org/journal/Pages/JUL18-Understanding-the-Tax-Torpedo-and-Its-Implications-for-Various-Retirees.aspx

Social Security Administration. N.D. How Work Affects Your Benefits. Retrieved from https://www.ssa.gov/pubs/EN-05-10069.pdf

Social Security Administration. N.D. Getting Benefits While Working. Retrieved from https://www.ssa.gov/planners/retire/whileworking.html

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Posts are general in nature and do not constitute the rendering of legal, investment, accounting or other professional advice.