Chris Stein, CFP®
How Work Affects Retirement Benefits
Working prior to claiming Social Security (SS) Retirement Benefits in a job that participates in the SS system generally will increase your benefit as you first accumulate your 40 credits of coverage and then as you amass your 35 computational years of earnings history. But how does work after “retirement” affect your benefits? These days it is quite common for people to either return temporarily to the work force or even remain working, but at a reduced load, after they “retire” from their full time career. We have previously discussed the effects of the Earnings Test on benefits if you earn above certain limits while collecting benefits prior to your Full Retirement Age (FRA). Today I would like to address working after your FRA and also the effect that any work after your age 62 will have on your retirement benefit.
Increase Your PIA?
As I’ve mentioned previously in our blog, your FRA benefit is actually calculated initially by the SS Administration when you reach age 62. At that time they consider your highest 35 years of indexed earnings to determine your PIA, which is your benefit at your FRA. However, if you continue to work after you reach 62, regardless if you have begun collecting SS retirement benefits, those years of additional work MAY increase your PIA. If any earnings year after age 62 is a greater amount than one of your previously used 35 indexed years, SS will recalculate your benefit and apply the adjustment the following year. If you have low or even zero earnings after 62, those years CANNOT be used to reduce your benefit. Once you pass 62 your PIA can only increase due to work, it will never decrease.
Taxing Your Benefit
Remember that if you begin receiving benefits prior to your FRA you will be subject to the Earnings Test and possibly taxation of your benefits which may very well reduce your effective current benefit, even as your PIA is being increased due to possibly high earnings years after age 62. Once you reach your FRA you will no longer be subject to the Earnings Test, but taxation will still be an issue to consider. As always, things are pretty straight forward in life until we try to adjust for the tax issue.
Be Sure To Get Something For Your Effort
One other caveat I need to mention is that if you continue to work after age 62 with the intention of growing your PIA, you need to be aware that if you do not earn enough to replace one of your previously used 35 years of earnings you will be working and paying SS taxes into the system and get no additional SS benefit whatsoever. So make sure you are actually going to receive the benefits you are seeking before deciding to go back to work. There are certainly many reasons to continue working after age 62, but make sure you are going to get the benefits you desire. Sometimes additional work will benefit you in the SS system, and sometimes it will not. If it won’t, just make sure you are getting something else you value in exchange.
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