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How Working During Retirement Affects Social Security

Katie Brockman, The Motley Fool

Now more than ever, seniors are leaving their full-time jobs and picking up part-time gigs during retirement -- in fact, nearly 19% of people age 65 and older are still working even during retirement, according to the latest U.S. jobs report, and 70% of Americans say they're going to continue working for as long as they're able.

While working during retirement is a smart idea (especially if your nest egg is a little smaller than you'd hoped for), it's also important to understand how that extra income will impact your Social Security benefits.

Social Security statement and calculator

Image source: Getty Images

Social Security and employment: Working hand-in-hand

You can still take your Social Security benefits even while working, but how much you'll receive will depend on how much you're earning. First, you'll have to calculate your full retirement age.

For people born between 1943 and 1954, your full retirement age is 66 years old. For every year after 1954, add two months (so your full retirement age is 66 years and 2 months if you were born in 1955, 66 years and 4 months if you were born in 1956, and so on).

Your Social Security earnings will only be affected if you're working and claiming benefits before you reach your full retirement age. The Social Security Administration determines an annual income limit, and for 2017, that limit is $16,920. For every $2 you earn above that limit, your Social Security benefits will be deducted by $1.

During the year you turn your full retirement age, though, the rules are slightly different. Your earnings will be deducted by $1 for every $3 you earn over $44,880, and only income earned before the month you turn your full retirement age is counted as earnings.

The bright side is that those "lost" Social Security benefits aren't really lost. Once you turn the full retirement age, the Social Security Administration will recalculate your benefits amount to include the benefits you lost while you were working. Plus, once you reach the full retirement age, your benefits won't be affected by your income no matter how much you earn.

Let's look at a hypothetical example

Say you're 64 years old and are receiving Social Security benefits while working part-time earning $21,920 per year (or $5,000 over the annual income limit). Let's also say you're entitled to receive $1,000 per month (or $12,000 per year) in Social Security benefits.

Because you're earning more than the annual limit, your benefits will be decreased by $1 for every $2 over the limit -- in this case, that amounts to $2,500 per year. So instead of receiving $12,000 per year in benefits, you'll receive $9,500 instead. But once you reach the full retirement age, if you're still earning less than the $44,880 income limit, your benefits will no longer be affected -- and your benefit amount will be recalculated to adjust for the income you earned.

Also, if you earn enough, you could have your entire Social Security benefit withheld. Say, for example, you have yet to reach your full retirement age, you're earning $50,000 per year, and you're entitled to receive $1,000 per month in benefits. Because you're earning about $33,000 over the annual income limit, your benefits would be reduced by about $16,500 -- which is more than you'd be earning in benefits.

In this case, you'd have your entire benefit withheld until you turn the full retirement age. At that age, in the months before you reach your full retirement age, your new annual income limit would be $44,880. Your benefits will then be reduced by $1 for every $3 you earn over the limit, which in this case would be a deduction of about $1,706 per year.

So is it worth it to work during retirement even when your benefits may be reduced? If you can and want to work, there's no reason not to. While you may see a decrease in your Social Security benefits, you'll generally be making up for it with extra income, and you should be able to recoup those losses in benefits once you reach the full retirement age.

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