Working for Social Security
Most of us expect to have a portion of our paycheck diverted into the black hole of government sponsored retirement income – namely, Social Security. Despite the fact that the Social Security system is broken, bankrupt and regardless of the certainty that those of us currently under age forty will never see a nickel of this money (unless something drastic happens) – there is a more pressing and hidden issue that affects anyone who plans on working during retirement.
What most people don’t know and the government has been very good at keeping quite (i.e. out of the mainstream media) is this – if you want to work during retirement, no matter the actual company you are employed by – you will actually be working for the Social Security Administration.
You might be wondering how big of a problem it could be if it only affects those that plan to work during retirement. Surprisingly, it is a huge issue – one that may affect an incredible 72% of retirees according to a recent 2009 survey. The survey found that nearly 3 in 4 workers nearing retirement expect to work at least part-time for pay during retirement.
The study found that while fewer retirees actually work in retirement (34% in 2009, 25% in 2008), the numbers are growing and the ongoing concerns over the economic problems of the last few years have increased this trend.
Obviously, there’s nothing wrong with wanting to work in retirement, regardless of the reason. But if you decide to earn some extra income, make sure you understand how it will affect your Social Security benefits.
Benefits and Working Before Full Retirement Age
If you begin collecting Social Security benefits anytime between age 62 and the beginning of the year in which you reach your full retirement age for Social Security, any wages you earn from a job or self-employment are subject to the earnings test, in which $1 of your benefits will be withheld for every $2 you earn in excess of the annual earnings limit ($14,160 in 2010; see example below). In the year in which you reach full retirement age, any income earned prior to your birthday will reduce your benefits by $1 for every $3 you earn over the annual limit ($37,680 in 2010). Once you reach full retirement age, your benefits are no longer affected if you continue working.
Vanishing and Reappearing Benefits?
When your income exceeds the earnings limit, it’s your responsibility to inform Social Security. Social Security will not adjust your monthly benefit amount but will withhold all benefits until the reduction has been fully applied (see example).
If it seems unfair to make benefits vanish just because you are working, consider this: When you reach full retirement age, the benefits you lost to the earnings test will reappear in the form of a higher monthly benefit.
If you expect to work in retirement, let that influence your decision about when to begin collecting benefits. You may eventually recover the lost benefits, but be prepared to go without a benefit check for several months at the end of each year you work. You can get more examples and other specifics about working while receiving benefits from the Social Security Administration website at http://www.ssa.gov/retire2/whileworking.htm.
Social Security specifically and retirement benefits in general are one of the biggest potential minefields retirees face and a quagmire of bureaucracy and legislative incompetency that is constantly changing. As always, I would recommend that you also consult with a “Financial Professional” before making any decision that may affect your income – especially those that concern Social Security.