Retirement can be incredibly expensive, and it is not uncommon for older adults to continue working in some capacity later in life. In fact, 75% of workers expect to work for pay in retirement, according to a 2024 report from the Employee Benefit Research Institute.
However, working while collecting Social Security can affect your benefit amount. The average working retiree could see their checks reduced by about $239 per month, and depending on your income, most of your benefits could be withheld. Here’s what to expect before 2025.
If you continue to receive income after receiving Social Security while you are on your own Full retirement age (FRA), your salary will be subject to the retirement earnings test income limit. When your income exceeds this limit, your benefits will be reduced in the years before your FRA.
To determine whether your benefits will be reduced, you will first need to know your exact FRA and your income for the year. Your FRA rate will depend on your year of birth, but is between 66 and 67 for everyone.
There are two income limits: one for those who will be well below their FRA in 2025 and a second for workers who will reach their FRA next year.
|
age |
Income limit in 2025 |
Reducing interest |
|---|---|---|
|
Under the FRA in 2025 |
$23,400 per year |
$1 deduction for every $2 earned over the limit |
|
It will reach FRA in 2025 |
$62,160 annually |
$1 deduction for every $3 earned over the limit |
Source: Social Security Administration. Table by author.
In 2024, full-time workers age 65 and older will earn a median wage of about $58,292 per year, according to data from the Bureau of Labor Statistics. Let’s say, for example, that you work only part-time in retirement while earning half that amount, or $29,146 per year.
Let’s also assume you’re 65 and your FRA is 67. These numbers would subject you to the smaller income limit, since you won’t reach your FRA in 2025. Your income in this case would be $5,746 above the annual limit, reducing your benefits At $2,873 per year, or about $239 per month.
The more you earn in retirement, the more drastic your benefit cuts will be. In extreme cases, you can also withhold the entire benefit amount. However, the good news is that your benefits will be recalculated in your FRA, and you will receive larger checks for the rest of your life.
The retirement earnings test is designed so that, in theory, you should recover all the benefits that were withheld. So, although these cuts can be severe in the short term, you’re not actually missing out on anything, assuming you spend a significant amount of time in retirement.
In one example provided by the Social Security Administration, a retiree who receives a regular benefit amount of $1,000 per month could have his or her payments reduced to just $655 per month after earnings test reductions. At that person’s FRA, he or she will begin receiving new payments of $1,070 per month.
To recoup the total of $16,560 withheld over their four years of employment, it would take 20 years to receive slightly larger payments after the FRA. In both cases, that worker will receive the same amount in total. But if you have reason to believe that you may not spend at least two decades in retirement, there is a possibility that you may not get back all of your withheld benefits.
In general, the advantages of working after getting Social Security often outweigh the disadvantages. Short-term benefit cuts can be painful, but the income you earn from your job may have a bigger impact on your overall budget than deductions.
However, it is still wise to consider your goals and preferences to make the best decision for your situation. When you know what to expect from the retirement earnings test, you can decide whether it’s really beneficial to continue working while you’re on Social Security.
If you’re like most Americans, you’re a few years (or more) behind on your retirement savings. But a handful of little-known “Social Security secrets” can help ensure your retirement income increases. For example: One easy trick can pay you up to a dollar22,924 More…every year! Once you learn how to maximize your Social Security benefits, we think you can retire confidently with the peace of mind we’re all after. Simply click here to discover how to learn more about these strategies.
View “Social Security Secrets” »
The Motley Fool has Disclosure policy.
Returning to work in retirement? It could cut your Social Security by $239 per month starting in 2025. Originally published by The Motley Fool