How Unretiring May Impact Your Social Security

When they were first introduced in 1935, Social Security retirement benefits were a game changer. It ensured that retirees aged 65 and older could receive an income even after leaving the workforce.

Over the years, retirement options have expanded. New account options, new retirement protection laws, and new investment opportunities help workers supplement their Social Security benefits and create their dream retirement.

Regardless of these expanded options, Social Security remains the cornerstone of retirement for many Americans. Over the last few years, a lot of them have “unretired”—that is, they’ve returned to work after already receiving their benefits.

This begs the question: Does returning to work impact their Social Security?

The “Unretiring” trend

When the COVID-19 pandemic hit, it brought with it an uptick in retirement. In 2020 alone, 3.2 million more boomers retired than in 2019. It was the most boomers ever to retire in one year.

There were several reasons for this. Many boomers were laid off or forced into retirement. Others left the workforce because of safety concerns when facing an unknown virus. Those without a degree found it difficult to gain safer employment, such as positions that let them work from home.

In the years since our economy inched closer to a recession. Whether we’re in one now (or soon will be) remains up for debate. Either way, inflation is on the rise and prices are going up. The stock market’s current rollercoaster trend has affected many 401(k)s and other retirement accounts. The current worker shortage means there are many open jobs that need filling.

These conditions have helped many retirees decide to rejoin the workforce. In the last year and a half, 1.5 million retirees have gone back to work—many of whom had already begun receiving Social Security benefits.

How Social Security works

In some ways, Social Security works like a savings account: you put money in and, eventually, you take money back out.

But it’s actually a little more complicated than that.

When you pay your income taxes, a percentage of your earnings goes into Social Security. But it doesn’t go into a personal “account” or another fund that continues to build until you retire. Instead, the money you pay in gets used almost immediately—as income for current retirees and other social security recipients.

Then, when you retire, those working during your retirement pay for your Social Security payments.

Ideally, Social Security earns more tax money over time, as average incomes go up. This helps immensely, as they adjust retirement payments to reflect the cost of living.

It works like this: the Social Security Administration (SSA) considers up to 35 years of your highest annual earnings—that is, those years you paid the most into Social Security. They then index those earnings to reflect modern wage amounts. These calculations help them determine your monthly benefit.

Depending on your full retirement age (FRA), Social Security payments could replace around 35% of your pre-retirement income.

Does retiring early affect social security benefits?

You can start collecting Social Security payments five years before you reach your full retirement age. For those born after 1960, the FRA is 67 years old. This means you can apply for Social Security once you turn 62.

The idea of early retirement appeals to many of us. However, it comes with a downside.

When you receive Social Security before you reach 67, you actually receive lower payments. The payments become lower for each month you receive benefits before reaching your FRA. The SSA offers this handy chart to help you figure out how much retiring early could affect your benefit checks.

If you wait until 67 (or whatever your FRA is), you’re entitled to your full retirement benefit payments.

Another reason to delay retirement

If you wait to receive benefits until after your FRA, your payments can actually go up. For every year beyond FRA that you delay retirement, you earn an 8% bonus to your Social Security payments. This bonus accrues each year until you reach age 70.

If your FRA is 67 and you wait to receive benefits until you turn 70, your payments could go up 24%!

Are you allowed to work/receive income during retirement?

The simple answer is “yes.” It’s perfectly legal for you to return to work and earn an income even after you’ve retired. However, the SSA sets income limits. These limits change every year and depend on whether you’ve reached your FRA. It’s a system referred to as the “retirement earnings test.”

If you retire before you reach FRA, the annual limit for 2022 is $19,560.

If you retire once you’ve hit FRA (or after), the annual limit for 2022 is $51,960. If you retire the same year you reach FRA, only the income you earn before retiring counts toward your limit.

As long as you stay below these amounts, you can receive your full benefits.

What happens when you earn above the limit?

Once you’ve earned above the annual limit, it affects your Social Security payments. If you’ve retired early, the SSA withholds $1 from your benefits for every $2 you’ve earned over the limit. If you’ve reached FRA, they withhold $1 for every $3 you earn over the limit.

To earn $19,560 in a year, you’d need to earn about $9.40 an hour and work full time (40 hrs/wk, 52 wks/yr).

If you live in a state with a $15 minimum wage (like California), working full-time would earn you $31,200. That’s $11,640 over the limit and could cost you $5,820 in benefits.

Can my benefits go up by unretiring?

Actually, your benefits can go up by unretiring—on one condition.

If your annual income from work is one of the highest in your career, the SSA recalculates your benefits. This is because you’re paying a lot more into Social Security. Depending on how much more you made (and contributed), your benefits might actually go up.

Creating a full retirement plan

As we’ve seen over the past few years, the economy can be fickle and unpredictable. That’s why I always recommend that Social Security should only be one leg of a full retirement plan. Many retirement plans exist, such as 401(k)s and IRAs.

You can calculate how much you might need for retirement on your own or hire a financial advisor. Taking steps to ensure your dream retirement now can reduce your need to “unretire” in the future—and ensure you receive your full benefits!