Deciding when to take Social Security benefits is one of the most important questions to answer when planning your retirement strategy. The second is to understand what may increase or decrease your profit amount. Does retirement income count as income for Social Security? No, but working while claiming benefits may reduce the amount you collect. Talking with a financial advisor can help you maximize Social Security benefits in retirement.
Understanding Social Security Benefits
Social Security retirement benefits are designed to provide a supplemental source of income to eligible seniors. You can start collecting Social Security retirement benefits as early as age 62, although doing so may reduce the amount you receive. Meanwhile, waiting until age 70 to start taking benefits can increase your benefit amount.
The benefit is calculated based on your earning history. Specifically, Social Security considers self-employment earned income, wages, and net income. If any money is withheld from your pay for Social Security or FICA taxes, your pay is covered by Social Security because you’re paying into the system.
When you apply for benefits, Social Security uses your average indexed monthly earnings to decide how much you qualify for. This average is based on up to 35 years of your indexed income and is used to calculate your Primary Sum Assured (PIA). The PIA determines the benefits you will be paid after you retire.
Does retirement income count as income for Social Security?
Retirement income is not counted as income for Social Security and will not affect your benefit amount. Specifically, the Social Security Administration excludes the following from income:
None of this is considered earnings for Social Security purposes. Then, Social Security only looks at the money you actually earn from holding a job or being self-employed. This means you can still collect Social Security benefits while taking withdrawals from a 401(k) or Individual Retirement Account (IRA) or receiving payments from an annuity. A reverse mortgage also will not affect your eligibility for Social Security benefits or Medicare.
With a reverse mortgage, you use the equity in your home, but instead of making payments to the lender, the lender pays you. You don’t have to pay anything back for a reverse mortgage as long as you’re living in the home. Many retirees choose to supplement Social Security benefits with a reverse mortgage.
Does working in retirement reduce Social Security benefits?
Under Social Security rules, you are considered retired when you begin receiving benefits. If you’re under full retirement age but still working, Social Security can deduct $1 from your benefit payment for every $2 earned above your annual limit. For 2023, the limit is $21,240.
The year you reach your full retirement age (FRA), the deduction changes to $1 for every $3 earned above a separate annual limit. For 2023, the limit is $56,520. Once you reach your full retirement age, your benefits are not reduced regardless of how much you earn. Social Security will also recalculate your benefit amount so that you get a credit for the months when your earnings reduced your benefits.
Coordinating Retirement Withdrawals and Social Security
The decision of when to take Social Security benefits begins with considering your other sources of retirement income. For example, this may include:
You can also add a Health Savings Account (HSA) here, although it’s not technically a retirement account. An HSA lets you save money for health care expenses on a tax-advantaged basis, but once you turn 65, you can withdraw money from it for any reason without tax penalty. However, you will be required to pay ordinary income tax on the distribution.
From a tax perspective, it usually makes sense to start with taxable accounts first, then tax-advantaged accounts for withdrawals, and leave Roth and Roth-designated accounts last. In doing so, you allow your Roth investments to grow tax-free until you need them.
In terms of when to collect Social Security benefits, it generally makes sense to delay if you’re expecting a large payout or have other sources of income to rely on. If you plan to continue working until your full retirement age, you may also want to consider stopping taking benefits, as this may allow you to claim a larger benefit amount.
Creating multiple sources of income for retirement without affecting Social Security
Since retirement income doesn’t count as income for Social Security, it can be beneficial to have more than one source that you can rely on. You may already be contributing to your 401(k) at work, but you can add an IRA to the mix for additional savings.
Whether it makes sense to choose a traditional or Roth IRA depends on where you expect to be tax-wise when you retire. If you expect to be in a lower tax bracket but could benefit from claiming deductible contributions now, you can choose a traditional IRA. On the other hand, if you want to be able to withdraw money tax-free in retirement, a Roth IRA may be a better fit.
Annuity is another option if you want to invest money now to generate guaranteed income later. When considering annuities, it’s important to learn how the different types of annuities work and what they may cost.
Real estate may be another possibility if you’re looking for a passive income option that won’t affect your Social Security benefits. You can buy rental property or become a flipper, but owning the property directly is not a requirement. You can also create passive investment income through real estate investment trusts (REITs), real estate crowdfunding platforms, or real estate mutual funds.
Talking with a financial advisor can give you a better idea of creating multiple sources of income for retirement, without affecting your Social Security benefits. If you are married, an advisor should also be able to help you design a strategy for you and your spouse to get the most benefits possible.
Retirement income won’t affect your Social Security benefits, but income earned from working can. If you plan to receive Social Security while you’re working, it’s helpful to know what this might mean for your benefit payments. Getting started early with saving and investing for retirement can delay taking Social Security so you can claim larger benefits.
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