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How Working During Retirement Impacts Social Security Benefits

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Returning to work during retirement might seem like a great way for your clients to supplement income – but they’ll need to understand what this might mean for their retirement income.

According to Michael D. Landsberg, CPA/PFS and member of the American Institute of CPAs’ Personal Financial Planning Executive Committee, Social Security planning is a major consideration for retirees looking for work. Depending on the situation, income earned during retirement may reduce Social Security benefits.

The impact of reentering the workforce while receiving Social Security depends on the client’s age and how much they earn. If your client is looking to return to the workforce while collecting Social Security benefits prior to full retirement age, he or she will need to assess whether the income exceeds established threshold amounts.

 “If an individual re-enters the workforce prior to full retirement age (FRA) – currently 66 years old – he or she will be subject to a Retirement Earnings Test, which temporarily reduces current benefits if earned income received is above certain thresholds,” Landsberg says.

Your clients may be surprised to find out the relatively small amount set for the earnings threshold.

“If you are collecting Social Security and are under your Full Retirement Age FRA, you are limited to earning $16,920 if you want to keep all of your Social Security benefits,” says Ted Sarenski, CEO and president of wealth management firm Blue Ocean Strategic Capital. But for every $2 earned above $16,920, the Social Security benefit is reduced by $1. Anyone working after FRA is not subject to the rule; they receive full benefits regardless of earnings.

Your clients, then, need to determine whether or not a temporarily reduced benefit is worth the income earned from work, or whether it’s better to allow the original Social Security benefit to grow until needed.

“It’s a very personal decision, but one that can be better thought out with the advice of a knowledgeable financial planner,” Sarenski says.

Each client, of course, brings a different story to the financial planning table. The key to getting the most out of Social Security, many professionals agree, is pre-planning. Jeff Weber, wealth advisor for Titus Wealth Management, notes that a good advisor can offer strategies to do just that, whether it’s advice on going back to work or recommendations on when to file for benefits.

If your clients can wait to go back to work, it’s certainly preferable than taking a hit to their Social Security earnings. Timing is everything when it comes to Social Security. Weber also reminds his clients that, even though they can receive Social Security benefits as early as age 62 ½ or as late as age 70, the longer they wait, the higher their monthly benefit will be.

“If you have longevity in your family and are healthy and want to get the max from Social Security, it’s smart to delay if you have the funds to supplement your income,” he says.