We all look forward to retirement—so much so, that we may plan on retiring early. The sooner we retire, the sooner we can start receiving our Social Security benefits, right?
Well, it’s actually not that simple.
Everyone has a full retirement age (FRA), which is the age at which you can retire and be eligible to receive full benefits. According to the Social Security Administration, your FRA depends on the year you were born.
For example, if you were born in 1960 or later, your FRA is 67. Those born in 1959 can retire at age 66 and 10 months, those born in 1958 at 66 and 8 months, and so on. As Americans’ life expectancies increase, their retirement ages increase. Click here to view your FRA.
So what happens if you retire before your full retirement age? How can retiring early affect your Social Security benefits?
How Retiring Early Affects Expected Social Security Benefits
If you are retiring early, you won’t be able to receive 100% of your monthly Social Security benefits. The earlier you retire, the less you’ll receive per month.
If your full retirement age is 67, but you retire at age 66 and 11 months, you’ll receive 99.4% of Social Security benefits. At age 66 and 10 months, you’ll get 98.9%. The earlier you retire, the less you’ll receive per month; the federal government figures that if they pay early retirees less than the full amount each month, the money they’ve paid into Social Security will last longer.
You could start collecting Social Security as young as age 62, but you’d only receive 70% of your benefits per month. You may choose to retire even earlier, but you won’t receive any Social Security payments until you turn 62.
Fun fact: If you choose to work past your full retirement age, you can earn over 100% of your full Social Security benefits every month upon retiring. The longer you work, the higher the percentage, but at age 70, the monthly percentage stops increasing.
How Working in “Retirement” Impacts Social Security Benefits and Taxes
After officially retiring, you may want to work full- or part-time to supplement what you’re earning from Social Security and from any withdrawals you may be making from a retirement account. While doing so is perfectly legal, you should know that the decision to keep working could result in financial repercussions, especially if you’re retiring early.
#1. Your Benefits
Let’s say you wait to retire until full retirement age. After retiring, you keep working in some capacity to earn more money. That’s fine! You should still receive full Social Security benefits.
But maybe you want to start collecting Social Security early while continuing to work your regular job. Or you retire early (before your full retirement age) but pick up part-time work to rake in extra money. The fact that you’ve decided to keep working as a retiree will affect how much you receive in Social Security.
As an early retiree in 2019, you can earn up to $17,640 without penalty. But once you earn more, your Social Security benefits decrease by $1 per every $2 you earn over $17,640.
If you’ll reach FRA during that calendar year, you can earn up to $46,920 without penalty. If you surpass that income level, your benefits decrease by $1 for every $3 you earn over that amount. The month that you hit full retirement age, you’ll stop being penalized.
If you plan to retire after 2019, do a little research. The exact numbers are subject to change from year to year.
Don’t worry, though—the money the government withholds isn’t lost forever! Once you reach full retirement age, the Social Security Administration calculates how much it withheld while you were working as a retiree, then adjusts the amount you earn in benefits from that point forward to make up for how much was kept from you.
#2. Your Taxes
First, let’s look at how working in retirement can affect income tax. Your Social Security benefits will be taxed if your combined income is above a certain amount. Combined income is the sum of your adjusted gross income, non-taxable interest, and 50% of what you earn in Social Security.
If your individual combined income is under $25,000 per year, or if you file jointly and the combined income is under $32,000, you don’t have to pay income tax on Social Security. Depending on how much you earn above that amount, between 50% and 85% of your Social Security payouts are subject to federal income tax (and sometimes state income tax, depending on where you live).
What exactly does this mean? Working during retirement, whether you retire early or at full retirement age, could potentially result in your paying income tax on Social Security benefits. It just depends on how much you make.
If you earn any wages after retirement, you will pay Social Security and Medicare taxes on those earnings. You won’t be taxed on income from retirement accounts, pensions, or investments—this only applies to wages from working.
Be Clear on YOUR Bigger Picture
Every retiree is different. It might make sense for you to retire early, or to keep earning income after retiring. But as a general rule, it’s ideal for you to keep working and delay receiving Social Security payments until full retirement age. This makes planning for retirement much simpler.
At McClain Lovejoy, we’re here to help! We’re happy to talk to you about how Social Security works, assist you in planning for retirement, and even help you retire early if that’s what you want.
Reach out to us to schedule a meeting, either in person or via video chat. If you’re not ready to sit down with us just yet, simply sign up for our email list below to receive information about retirement and financial advising. We’d love to help you retire comfortably and enjoy your retirement years.