How and when you file for Social Security is an important decision and has a big effect on the size of the Social Security checks throughout retirement. But what many people may not realize is that monthly Social Security benefits may be reduced if a recipient continues working while receiving them. So, when planning for your income in retirement, a question to ask yourself is – Should I continue working while receiving Social Security? Before you decide it is important to truly understand how working affects your benefits.
A big factor is the age at which you file. Natural Retirement Age (NRA) is the age at which an individual can expect to receive 100% of his or her normal retirement benefit, without reduction for early retirement. For those born in 1937 or earlier, NRA is age 65. For those born after 1937, NRA gradually increases until it reaches age 67 for those born in 1960 or later.
If you are working and younger than the NRA, your 2014 exempt amount is $15,480. This means that you lose one dollar in benefits for every two dollars that is earned over the exempt amount. If you are in the year that NRA is reached your 2014 exempt amount is $41,400: one dollar will be lost for every three dollars that is earned over the exempt amount. When NRA is reached there is no loss in benefits. Here are a couple of examples to illustrate:
Example (1): An individual begins receiving Social Security benefits at age 63 in January 2014, with an entitlement of $500 per month. If the retiree works and earns $25,480 during the year, he or she would have to give up $5,000 of Social Security benefits ($1 for every $2 over the $15,480 limit), but would still receive $1,000.
Example (2): Assume an individual reaches NRA in November 2014. Also assume the individual earns $53,280 during the year, with $44,400 of this amount being received in the first 10 months of the year. The individual would give up $1,000 in benefits, $1 for every $3 earned above the $41,400 limit. Assuming a Social Security retirement benefit of $500 per month, the individual would still receive $4,000 out of the $5,000 for the first 10 months of the year. Full benefits of $1,000 ($500 per month) would be received for November and December, after NRA was reached.
Wages earned after retirement from work as an employee and any net earnings from self-employment count as earnings for Social Security purposes. This also includes bonuses, commissions, fees, vacation pay, pay in lieu of vacation and cash tips of $20 or more in a month.
There are a number of items that do not count as earnings. Here are just a few:
- Investment income, including stock dividends, interest from savings accounts, income from annuities, limited partnership income and rental income from real estate you own (unless you are a real estate broker).
- Income from Social Security, pensions, other retirement pay and Veterans Administration Benefits.
- Gifts or inheritances.
- Royalties received after age 65 from patents or copyrights obtained before that year.
- Benefits withheld restored at Normal Retirement Age (NRA)
Filing for Social Security benefits is an important decision, one that can affect your retirement income so make sure you have the most information possible. If you have any additional questions about Social Security, consult a financial advisor to get the answers you need.
This information is for educational purposes and should not be considered specific financial, tax or legal advice. Always consult with a qualified advisor regarding your individual circumstances. Investment Advisory Services offered through Global Financial Private Capital, LLC, an SEC Registered Investment Adviser.
Brad Zucker, RFC® is the president of Safe Money Advisors, Inc., a Las Vegas-based independent financial advisory firm. He blogs on personal finance every Monday for the RJ. For more information visit www.SafeMoneyAdvisorsNV.com or connect with him viaFacebookand LinkedIn.