It’s often said that retirement is not a destination, it’s a journey. Some retirees find the journey includes a return to part-time work. A few of the common reasons for reentering the workplace include a lack of retirement savings, pursuing a second career, rising health insurance costs or even boredom. For many retirees, simply having a job that they enjoy is a good reason to get up in the morning. Let’s also not underestimate the impact that boredom can have on your mental and physical health. In fact, the healthier you are, the less you are likely to spend on health care costs during retirement. If you are planning to work during retirement, even if only part-time, here’s how this decision could impact your Social Security benefit and taxes situation.
Does it Make Sense to Work and Collect Social Security?
The simple answer is that it depends on your age. Determining, however, if it makes financial sense for you to work and collect Social Security at the same time is a more complicated assessment. It depends on how much you earn and when you begin taking Social Security benefit. While it can seem tempting to take your Social Security benefit as soon as you’re eligible at age 62, it can be a costly decision. Starting Social Security at age 62 can mean a 25% reduction in your monthly benefit versus waiting until what the government considers your “full retirement age” or FRA. Furthermore, recent changes to Social Security mean that age 65 is no longer the milestone for FRA. Depending upon the month and year in which you were born, FRA now ranges from age 66 to 67.
A Paycheck Can Affect your Social Security Check
Aaron Steele, a financial planner with Steele Capital Management in Olympia, Wash. points out that if you’re counting on a certain level of Social Security income to supplement your part-time job, it’s important to be aware of how your paycheck can affect your benefit check. There is a limit to how much you can earn and still receive your full Social Security benefit if you are younger than your FRA. The income limit is scheduled to increase each year, but for 2017 you can earn up to $16,920 ($1,410 per month). For every $2 you earn over the $16,920 limit (in 2017) Social Security deducts $1 from your benefit.
“Social Security will only allow you to earn $16,920 this year (2017) before you start seeing your benefit check reduced by a $1 for every $2 you earn at work,” says Steele. “For my clients that have returned to part-time work post-retirement, I work closely with them to incorporate Social Security planning into their overall financial plan. Ongoing monitoring of their financial situation helps ensure that they don’t encounter an income shortfall by losing benefit dollars to withholding.”
In the short-term, this reduction can appear to be significant for those that claim their Social Security benefit before FRA and continue to work. The good news is that if Social Security does withhold a portion of your benefit, some of those dollars will be returned to you by way of a higher monthly benefit once you reach FRA. Additionally, if your most recent year of earnings turns out to be one of your highest income years, Social Security will recalculate your benefit based on the higher earnings.
If you reach your FRA in 2017 and will celebrate your birthday in the fall or winter then you need to plan carefully. Between January and the month of your birthday, you can earn up to $44,880 (in 2017) without any benefit withholding. If you earn more than $44,880 (in 2017), Social Security will deduct $1 for every $3 you earn over the limit. Once your birthday passes, the income limit no longer applies.
In determining your earnings, Social Security will include not only your wages but also commissions, bonuses and vacation pay. Income from annuities, pensions, interest, IRAs, investment earnings, federal employee or civil service retirement benefits and capital gains are not included in the calculation. The Social Security Administration provides an Estimated Retirement Calculator on their website that can help you estimate how your earnings could affect your benefit.
Taxes and the Good Old Days
The first person that uttered the words “the good old days are gone” must have been referring to a time when Social Security was completely tax-free income for every recipient. It still holds true that your Social Security benefit won’t be subject to income tax if that’s the only income you receive during the year. However, if you have income from other sources such as a part-time job or a retirement plan such as a Thrift Savings Plan (TSP), 401(k) or pension then a portion of your benefit may become taxable. The worksheet contained in IRS Publication 915 is a good starting point to determine if a portion of your Social Security benefit is subject to income taxes. For more complex tax situations you may benefit from consulting a qualified tax professional.
In addition to the federal government potentially taxing a portion of your Social Security, 13 states also tax benefits. As of the date of this publication, Connecticut, Colorado, Kansas, Nebraska, New Mexico, Minnesota, Missouri, Rhode Island, Utah, Vermont, Montana, North Dakota and West Virginia all have the potential to tax a portion of benefits for its residents. Many of these states only tax a very small percentage of the population due to rather generous income exemptions. However, four of the states follow the federal government schedule of no exemptions. These states are Minnesota, North Dakota, Vermont and West Virginia. Based on the potential bite that taxes can take out of your Social Security benefit, it’s easy to see that where you retire matters.
Throughout your working years, you have probably viewed your retirement as a destination. The professionals at Public Sector Retirement, LLC (PSR) want to change your perception to one that retirement is simply a milestone on your journey. Your life will continue to evolve and that may include a return to the workplace. If your vision of retirement potentially includes working part-time, it’s important to carefully plan when to begin your Social Security If you are planning to work during retirement, even if only part-time, here’s how this decision could impact your Social Security benefit and taxes situation. It is quite clear that when you choose the best date to retire, you should also think of whether you plan to work in retirement because if you do, you may need to pay heavy taxes on retirement benefits savings or you may get less social security benefits than you expected.