Here’s one to make you pull out your calculator or your hair.
A growing number of retirees have stepped off the sidelines and headed back to work this year, but one thing that might surprise them is the impact that any income, even from part-time work, can have on their Social Security benefit.
I hear this all the time from retired family members, friends, and readers.
Roughly 1.5 million retirees have unretired and reentered the U.S. labor market over the past year, Nick Bunker, the director of economic research at Indeed Hiring Lab, told Yahoo Money.
“That’s more than 3% of retired workers who have made the decision to return to work, a continuation of a trend that started in the spring of last year,” he said.
The impetus for many has been soaring inflation and the volatility of the stock market rattling retirement accounts.
Unretiring is good news in my book. I’m a big fan of working as long as you can to build financial security to support a longer, healthier life span. And, of course, there are all the other good things that work in some fashion can provide like a social network, the psychological boost of feeling relevant and needed, and the mental engagement to use it before you lose it.
But the problem is some of those former retirees who were pushed out of the workforce due to a layoff or accepted early retirement packages in the first year or so of the pandemic decided to tap into their Social Security benefits for income. They were eligible if they were age 62 or older and figured it made sense to turn it on. I get that.
But that’s where things get tricky. The sweet new paychecks might trigger the Social Security retirement earnings test; a formula that withholds a portion of benefits if your wage income exceeds a set level.
“The Social Security earnings test is problematic even without the pandemic, but it's even more pronounced now,” Martha Shedden, president of the National Association of Registered Social Security Analysts (NARSSA), which has trained more than 3,000 advisors on how to help their clients make optimal Social Security decisions, told Yahoo Money. “There are quite a few people out there dealing with this because of what's happened in the past almost three years.”
Take a breath.
Here’s how it works. The earnings test applies only to people who are collecting Social Security between 62, the earliest age of eligibility, and their full retirement age — between 66 and 67, depending on the year you were born.
On the face of it, you’re allowed to claim Social Security retirement benefits while working. And the withheld benefits are not lost — Social Security recalculates monthly benefits when you reach full retirement age to credit back the withheld benefits.
But retirees caught in this situation are often baffled.
For instance, there can be months between when wage income is reported to the Social Security Administration and when Social Security starts withholding from your check. If you’re a contract worker, that sum might not be revealed until you file your taxes. As a result, you’re overpaid by their calculations, and you have to pay back the benefits.
“That’s not a good situation to be in,” Shedden said.
In general, the way the earnings test works is if you’re between age 62 and your full retirement age and earn over $19,600 this year (the limit is adjusted annually), and you're collecting Social Security, the administration will withhold $1 for every $2 over that limit.
For people hitting their full retirement age in 2022, the annual exempt amount is $51,960. This higher exempt amount applies only to earnings made in months prior to the month you hit your retirement age.
“This is a hot topic,” Justin Smith, a fee-only certified financial planner with Savant Wealth Management in Phoenix, Arizona, told Yahoo Money. “Lots of my clients are asking me about Social Security, and how it plays into their desire to keep working longer, or start a business, or consulting practice. They’re blurring the lines, which makes when to take Social Security a lot more complex.”
The good news is that the earnings test goes away at full retirement age. But it might make sense to put the brakes on taking the benefit until age 70.
“If your world changed, and you’re back at work and no longer need that income from Social Security, you can voluntarily suspend it and hit the pause button between full retirement age and 70,” Smith said. “You get to earn those delayed retirement credits, which is roughly an 8% per year annual increase.” The benefit increase stops when you reach age 70.
For unretirees who are pre-full retirement age, it's a whole different set of circumstances. You essentially have two options. Option one is you can withdraw your application for benefits in the first 12 months.
“That's a complete undo, and you can only do this one time,” Smith said. “That means you have to pay back the benefits you received. I don't see it all that often because people don't typically like to pay back those benefits.”
Of course, if you know for certain that you're going to be beneath that threshold, then you could have the best of both worlds where you're getting a Social Security check and a paycheck with no earnings test consequences.
In either case, your best move is to contact your local Social Security office once you have a handle on your income and decide whether you want to pause your benefit or withdraw your application.
One parting thought that I would be remiss to ignore here.
Even if your earnings are below the earnings test threshold, your extra income could trigger Social Security taxes.
If you file a federal tax return as an “individual” and your combined income is between $25,000 and $34,000, you may have to pay income tax on up to 50% of your benefits and if it is more than $34,000, up to 85% of your benefits may be taxable.
If you file a joint return, and you and your spouse have a combined income that is between $32,000 and $44,000, you may have to pay income tax on up to 50% of your benefits and more than $44,000, up to 85% of your benefits may be taxable.
And so it goes.
Kerry is a Senior Columnist and Senior Reporter at Yahoo Money.
Follow her on Twitter @kerryhannon