As economic times change and people begin to live longer, it’s becoming more and more common for workers to continue working through retirement. In fact, the 16th Annual Retirement Survey put out by Transamerica Center for Retirement Studies found that 51% of people plan to keep working in retirement1.
Luckily, the Social Security system allows you to earn income while receiving benefits or survivor benefits. However, your benefits will be reduced if your earned income is more than the government’s limits before reaching your full retirement age. To make things even trickier, not all earnings are considered “earned income”.
So what does and does not count as earned income? Here are the categories:
If you work for an employer, your gross earnings will count towards your earnings limits for Social Security benefits. That means Social Security considers your wages before any deductions such as income taxes, insurance, and other expenses. What Social Security doesn’t count are your special payments – which includes income such as unemployment compensation, investments, interest, pensions and annuities.
If you are self-employed, your earned income is any earnings you make after business expenses. This income counts when you receive it, versus when it was actually earned (with the exception of if the income was paid after you were already entitled to Social Security but was earned before you were entitled). There are also some special rules that apply to insurance salespeople who receive commissions for policies they sold before they began collecting benefits. These commissions will not affect their Social Security benefits so long as they are the result of work done before retirement.
Essentially, any income that is not considered employment or self-employment income is exempt. This includes a wide variety of income sources, such as pensions and retirement pay, interest and dividends from stocks and bonds, and IRA payments. A more exhaustive list can be found in the Social Security Handbook located here https://www.ssa.gov/OP_Home%2Fhandbook/handbook.18/handbook-1812.html.
While working and collecting Social Security, your benefits will be reduced $1 for every $2 of earnings over the excess of $15,720 and $1 for every $3 of earnings in excess of $41,880. Once you hit full retirement age, there is no longer an earnings test. Depending on when you were born, your full retirement age is either 65, 66 or 67. This chart will help you find out your full retirement age https://www.ssa.gov/oact/ProgData/nra.html.
Money Not Gone Forever
If you do lose Social Security benefits because you earned more than the earnings test limit, the money is not gone forever. Any benefits that were withheld because of your employment earnings will be returned in monthly installments once you have reached your full retirement age2.
Have additional Social Security questions? We’re happy to help! Please feel free to contact us any time. Walsh & Associates is your fully comprehensive financial advisor with locations in Sarasota, FL and DeKalb, IL. We offer investment management, retirement planning, estate planning, and tax planning services with a commitment to your individual financial planning needs.