Retirement planning is a delicate process, and you need to carefully consider your various income streams, including Social Security benefits. For those of us who plan to continue working during retirement while claiming Social Security, it’s important to understand how this decision can impact the monthly benefits you receive.
In this episode, we’re sharing how to avoid financial shocks in retirement. We discuss the essentials of earned income, the reduction in benefits due to excess earnings, and specific scenarios such as spousal and ex-spouse benefits.
What to Know About Working During Retirement and Social Security
The Social Security Administration (SSA) has specific rules that define what constitutes earned income. Understanding these rules is fundamental to ensuring that you don’t accidentally reduce your Social Security benefits.
Grayson explains that earned income includes wages from a W-2 job and net earnings from self-employment. This means any work where you’re receiving a paycheck—whether it’s part-time, full-time, or as a contractor—is considered earned income.
More importantly, if you’re younger than your full retirement age (which ranges between 66 and 67 for most people) and your earned income exceeds a specific threshold, your Social Security benefits will be reduced. If you weren’t aware of this, you may need to revisit your retirement plans to ensure you don’t get any surprises.
Reclaiming Reduced Benefits
You might be wondering if these reductions mean that your money is permanently lost. Fortunately, the SSA’s “Adjustment to the Reduction Factor” ensures that once you reach your full retirement age, any benefits that were reduced due to earned income are added back into your monthly benefit. This adjustment helps mitigate the impact of earlier reductions, effectively increasing your monthly benefit at full retirement age.
We also dig into what to do if your earnings situation changes, and Grayson explains why it’s imperative to inform the SSA. If you don’t do so, you might get an unexpected notice requiring repayment of overpaid benefits, which could happen years down the line, posing a real financial shock to retirees who have already spent the overpaid benefits.
Maximizing Social Security Benefits
To make the most of your Social Security benefits, some financial advisors recommend delaying claims until full retirement age or even age 70. Delaying claiming your benefits allows you to boost your monthly payment, which serves as a form of “old age insurance,” giving you a higher lifetime income—this is particularly beneficial now that our overall life expectancy has increased.
Continuing to work can also increase your Social Security benefits if your ongoing earnings are among your highest 35 years of income. Since Social Security benefits are calculated based on your 35 highest-earning years, more high-earning years will replace lower-earning years earlier in your career, further increasing your benefit.
If you’re in the midst of your retirement planning, then you’ll definitely want to listen to this episode to find out how to ensure a financially comfortable retirement.
Outline of This Episode
- [1:08] Social Security benefits may be impacted if you work while claiming
- [04:27] How retirement financial planning strategies vary by individual circumstances
- [07:17] Earnings affect Social Security benefits before retirement
- [11:51] Your spouse’s income doesn’t affect your Social Security
- [15:18] SSA withholds payments until excess income is accounted for
- [18:44] Social Security timing advice
- [20:04] Seek financial advisor help to make an educated decision about retirement
