Sandra W. Reed: What if a retiree works while taking Social Security benefits?

Attorney Sandra W. Reed

Attorney Sandra W. Reed answers your questions about retirement, elder care and other life planning issues.

J. Ward Moorehouse, a veteran news reporter, plans to retire in 2013 at age 62 even though he does not reach full retirement for Social Security retirement benefits purposes until he is 66.  (Full retirement for anyone born from 1943 to 1954 is 66. It gradually increases to 67 for those born in 1960 or later.)

Using the online benefits calculator located at , Ward estimated his monthly Social Security benefit to be $1,923, which translates into $23,076 annually.  Ward has limited savings, which he is reluctant to tap for anything other than emergencies.

He calculated his required expenses and prepared an “austerity budget.”  Ward was shocked to discover that, even living frugally, he needs a minimum of $3, 000 a month, or $36,000.00 annually, to pay all his routine bills, eat out once in a while and take a modest annual excursion once during the year.

Ward has been looking forward to leisurely days, having time to go fishing and piddle in his garden. Now he is afraid he will have to forget that and continue working fulltime. What are Ward’s options?

He can begin taking his benefit of $1,923 each month and continue to work during the year 2013, and his earnings will not reduce that monthly amount as long as he does not earn more than $15,120. For example, if Ward cuts back his hours from a 40 hour week to a 20 hour week, for which he is paid $ 1, 000 a month or $12,000, he will be able to work part time all year without reducing his benefits.

With the income from this part time work, in addition to his Social Security income, Ward will make more than he needs to meet his budget requirements while having an additional 20 hours a week for whatever he chooses to do.

Should Ward’s income exceed $15,120 in 2013, Social Security will deduct $1 from his monthly retirement benefit for every $2 he makes over that annual limit. For example, if Ward earns $20,000 from working in 2013, meaning he has earned $4,880 over the annual limit, his benefit will be reduced by $2,440.

The annual earnings limit changes each year. Social Security notifies its beneficiaries in advance of each year’s figure.

Beginning with the month of his 66th birthday, Ward may earn an unlimited amount without penalty to his Social Security income. Also, Social Security will recalculate his benefit after he reaches full retirement age, leaving out the months in which his benefit was reduced due to his earnings over the limit.

Social Security will track Ward’s earnings either through the earnings reported by his employer on his W-2 or through the self-employment earnings he reports on his income tax return, depending upon whether he works for someone else or himself.

Social Security counts wages towards the earnings limit differently, depending upon whether they are wages or self-employment income.   For example, if Ward continues to work at the newspaper where he worked before retirement, his wages count toward the limit when they are earned, not when they are paid.  If he earns wages in December, 2013 but is not paid until 2014, the wages are applied to the earnings limit of 2013.

However, if Ward sets up his own business, Social Security counts his income towards his limit when he receives it rather than when he earns it.  Therefore, if  he earns income on a project done in 2013 but is not paid until 2014, the income counts against his earnings limit of 2014.

Special Rules for Year in Which Retiree Reaches Full Retirement Age

Eleanor Stoddard works until January 2013, when she retires from her job at Macy’s just months before her 66th birthday in September, when she will be able to receive full retirement benefits.

Eleanor is a crackerjack designer who has been underpaid her entire career. After leaving Macy’s, she lands a project which will take six months to complete and for which she is to be receive a total of $40,000 divided into increments, the last of which will be paid on June 30. Eleanor gleefully accepts the offer, but wonders if she should postpone taking retirement benefits.

Eleanor does not have to forego her monthly Social Security check. The limit on a retiree reaching full employment in 2013 is $40,080. Eleanor’s earnings fall just below that amount. If she receives additional monies in September or thereafter during 2013, she receives her full benefits with no deduction regardless of the amount of her earnings in those months.

Income Tax on Social Security Benefits

Both Ward and Eleanor are concerned about whether they will have to pay income tax on their Social Security benefits. Ward is single, so he will have to pay taxes on his benefits if his annual income is more than $25,000. Since he has decided he cannot live on less than $36,000 and plans to supplement his Social Security benefits to at least that amount, we can assume he will pay taxes on his benefits.

Eleanor is married and she and her husband routinely file a joint return. She will have to pay taxes on her benefits if she and her spouse have a joint annual income is greater than $32,000.

Eleanor also will have to pay taxes on her benefits, regardless of how much her spouse makes, because her income will include the $40,000 earnings on her project, which alone exceeds the threshold for taxable earnings.

Sandra W. Reed is an attorney, of counsel with Katten & Benson, an Elder Law firm.  Contact her at 254-797-0211 or at if you have questions, or wish to request a topic for the Life Care Planning column. 

2 Responses to Sandra W. Reed: What if a retiree works while taking Social Security benefits?

  1. Vicki Oliver Reply

    February 1, 2013 at 9:01 pm

    My husband and I are 62 and began receiving SS in 2012 after he retired from work. How are the withdrawals from 401k in 2012 counted along with SS of about $27,000. Taxes were held from those withdrawals. As of 1/01/13 there are no more 401k funds.
    Thank you.

    • Kathryn Reply

      February 1, 2013 at 9:34 pm

      Thank you for your comment, Vicki. We’ll make sure Sandra gets it and I’m sure she’ll respond as soon as she can. Thanks for reading, Kathryn Jones

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