Can I Continue to Work While Drawing Social Security Benefits?

By Baker Newman Noyes February 7, 2013

The impact of earned income on social security benefits before full retirement age

Effectively managing the risk associated with retirement income planning often necessitates that advisors work holistically with clients, and factor income from a variety of sources. Two primary reasons why this approach can be appropriate are, 1) Social Security benefits are not typically substantial enough to solely fund our needs in retirement, and 2) longer life expectancies mean that retirees run the risk of outliving retirement savings.

Given this evolving conundrum, we increasingly encounter clients who embrace a definition of retirement that does not involve an immediate exit from the work place. They might plan to scale back on working, say in their early 60s, and supplement diminished wages with income from other sources. Rather than taking distributions from 401(k) plans, they believe that it is better to leave those monies untouched, and utilize Social Security benefits as a supplement to their decreased wages. The hope is that plan assets will continue to grow tax deferred. This will help mitigate the inherent financial risk in living longer.

The strategy of supplementing a diminished wage with Social Security income, as opposed to distributions from a 401(k) plan or other retirement savings, does merit consideration. Retirees should be aware, however, of the following general guidelines when making their decisions:

• The Social Security Administration determines full retirement age (FRA) as a function of when you were born. The current range is 66-67 years old. Drawing benefits before FRA typically results in a decreased benefit, while delaying the receipt of benefits beyond FRA, and up to age 70, can result in the accumulation of additional retirement credits and thus a higher social security benefit.
• Drawing benefits between age 62 and FRA, in combination with wages from an employer or net earnings from self-employment, can reduce the current Social Security benefits you receive.
• Other earnings such as pensions, annuities, investment income or other government benefits received during the period between age 62 and FRA do not impact Social Security benefits.

As it relates to the second point, a general earnings test is in place that can help a retiree assess the risk associated with this strategy. For the year 2013, if you are between the ages of 62 and FRA, and have earned income up to $15,120, you will not generally experience any reduction in Social Security benefits. As you exceed that threshold, your benefit will be reduced by $1 for every $2 earned. In the year that FRA is reached, the earnings limit is currently $40,800, and the reduction of benefits is $1 for every $3 of earned income over the limit.

It should be noted, however, that if you do have benefits reduced as the result of having earned income, your Social Security benefit when you reach FRA will be recalculated upward to account for those months in which benefits were withheld.

If you have questions about how Social Security benefits fit into your retirement income planning, please call your BNN advisor at 800.244.7444.