Determining when to take Social Security benefits is one of the most important questions to answer when planning your retirement strategy. The second is to find out what can increase—or decrease—the amount of your benefits. Does retirement income count as income for Social Security? No, but working while claiming benefits can reduce the amount you can collect. Talking to a financial advisor can help you maximize your Social Security benefits in retirement.
Understanding Social Security Benefits
Social Security retirement benefits are designed to provide an additional source of income for eligible seniors. You can start taking Social Security retirement benefits as early as age 62, although doing so may reduce the amount you receive. Waiting until age 70 to start taking benefits, meanwhile, can increase your benefit amount.
Benefits are calculated based on your earnings history. Specifically, Social Security considers income, wages and net income from self-employment. If any money is withheld from your wages for Social Security or FICA taxes, then your wages are covered by Social Security from the time you pay into the system.
When you apply for benefits, Social Security uses your average indexed monthly earnings to decide the appropriate amount. This average is based on up to 35 years of indexed earnings and is used to calculate the primary insurance amount (PIA). PIA determines the benefits that are paid to you when you retire.
Does Retirement Income Count as Income for Social Security?
Retirement income is not considered income for Social Security and will not affect your benefit amount. Specifically, the Social Security Administration excludes the following from income:
None of this counts as income for Social Security purposes. Again, Social Security only looks at money you earn from working or being self-employed. That means you can collect Social Security benefits while also taking withdrawals from your 401(k) or individual retirement account (IRA) or receiving payments from an annuity. A reverse mortgage will not affect your Social Security benefits or eligibility for Medicare.
With a reverse mortgage, you follow the home’s equity but instead of paying the loan to the lender, the lender pays it to you. You don’t have to pay anything back towards a reverse mortgage as long as you live in the home. Many retirees choose to supplement their Social Security benefits with a reverse mortgage.
Does Working in Retirement Reduce Your Social Security Benefits?
Working while you’re also drawing Social Security benefits can lower your monthly payments, depending on your age and income.
Under Social Security rules, you are considered retired once you start receiving benefits. If you’re under retirement age but still working, Social Security can deduct $1 from your benefit payments for every $2 you earn over the annual limit. For 2023, the limit is $21,240.
In the year you reach full retirement age (FRA), the deduction changes to $1 for every $3 earned above the different annual limits. For 2023, the limit is $56,520. Once you reach full retirement age, your benefits will not be reduced, even if you earn them. Social Security will also recalculate your benefit amount so that you get a credit for the month that your benefits were reduced because of your earnings.
Coordination of Pension and Social Security Withdrawals
Determining when to take Social Security benefits begins with considering other sources of retirement income. For example, it may include:
You can also add a health savings account (HSA) here, although it’s not technically a retirement account. An HSA allows you to save money on a tax-advantaged basis for health care expenses but once you turn 65, you can withdraw the money for any reason without tax penalty. You will, however, pay regular income tax on the distribution.
From a tax perspective, it usually makes sense to start with a taxable account first, then a tax-advantaged account for withdrawals, leaving the Roth and Roth-designated accounts last. By doing so, you allow your Roth investment to continue to grow tax-free until you need it.
In terms of when to take Social Security benefits, delaying usually makes sense if you’re hoping to get a bigger payout or you have another source of income you can rely on. You may also consider taking benefits if you want to continue working until your full retirement age, as they may allow you to claim a larger amount of benefits.
A financial advisor can help you create an efficient plan to coordinate your retirement income. Matched with a fiduciary financial advisor.
Create Multiple Streams of Income for Retirement Without Affecting Social Security
Because retirement income doesn’t count as income for Social Security, you may have more than one reliable source. You may already contribute to a 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 may depend on where you expect to be tax-wise when you retire. You may choose a traditional IRA if you expect to be in a lower tax bracket but can benefit from claiming tax-deductible contributions now. On the other hand, a Roth IRA may be preferable if you want to be able to withdraw money tax-free in retirement.
Annuity is another option if you want to invest money now to generate guaranteed income later. When considering an annuity, it is important to learn how different types of annuities work and what they can cost.
Real estate can be another possibility if you’re looking for a passive income option that won’t affect your Social Security benefits. You can buy a rental property or become a flipper, but owning a property outright 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 to a financial advisor can give you a better idea of ​​how to create multiple income streams for retirement, without affecting your Social Security benefits. Counselors should also be able to help you strategize to get the most benefit for you and your spouse once you are married.
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Retirement income will not affect your Social Security benefits, but income earned from work may. If you plan to draw Social Security while working, it’s important to understand what it means to pay your benefits. Starting early by saving and investing for retirement can allow you to delay taking Social Security so you can claim larger benefits.
Retirement planning tips
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Working with a financial advisor can help you adjust your retirement plan. Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three designated financial advisors serving your area, and you can have a free introductory call with your advisor to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, start now.
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Social Security benefits are taxable to retirees with substantial income from wages, self-employment, interest and dividends. If you’re working while claiming benefits or earning profits and dividend income, you may have to pay tax on some of your benefits, depending on how much you earn.
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Check out our free pension calculator for a quick estimate of what you can expect based on your age, expected retirement and income sources.
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Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t at risk of significant fluctuations like the stock market. The tradeoff is that the value of liquid cash can be eroded by inflation. But high interest accounts allow you to earn compound interest. Compare savings accounts from these banks.
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