Continuing to work part-time after retiring may be the key to retiring early, but remember that this can reduce your social security benefits.
Working part-time after your early retirement is an appealing option for many reasons. It may provide the financial buffer you needed to retire early, it may be your cure to boredom or you may simply enjoy working. However, many are not aware that earnings from part-time employment prior to full retirement age could reduce your social security payments.
The deductions that apply are:
- If you are younger than full retirement age during all of calendar year 2014, the SSA will deduct $1 from your benefits for every $2 that you earn above $15,480.
- If you reach full retirement age during calendar year 2014, the SSA will deduct $1 from your benefits for every $3 that you earn above $41,400 until the month that you reach full retirement age. (Note that these dollar thresholds change each year).
For example, if you were entitled to a $700 per month social security payment (or $8400 per year), and earned $20,000, your social security payments would be reduced by $2260, to $6140.
The following table sets out what should be included in calculating your earned income:
|Include in income||Do not include in income|
It is also important to keep in mind what the SSA considered to be retired if you are self-employed, as the threshold is much lower than the standard 40-hour workweek. If you work more than 45 hours per month in self-employment, you are not considered retired. If you work less than 15 hours per month, you are considered retired. If you work between 15 and 45 hours per month, you will not be considered retired if you are employed in a job where you performing substantial services, taking into consideration the amount of time spent working, nature of services performed, comparison between services performed before and after retirement, business type, presence of a qualified manager and amount invested in the business. However, services would likely not be considered substantial if your earnings are less than the income limit and you do not have a significant investment in the business.
Note that all is not lost – the SSA does recalculate your monthly benefit starting at your full retirement age to account for months in which benefits were withheld. However, the withheld amounts are only paid back little by little each year, and of course you still suffered a permanent reduction in your benefits by beginning benefits prior to your full retirement age (see Part 2 of this series, Social Security, for more on this).