Texas-based Pamela Shields earns £1,166 ($1,470) in monthly Social Security checks, which is hardly enough to pay her bills and support her family. Her long career in human resources ended when she was 59 due to a car accident.
Moreover, unexpected medical expenses and helping the family sustain through two divorces led Shields to tap into her 401(k) prematurely, leaving her with meagre retirement savings. The dire situation compelled Shields to take up multiple gigs, working seven days a week to supplement her monthly income.
Millions Returning To The Workforce Due To Financial Challenges
Shields' story resonates with millions of Americans who retired earlier than planned due to financial challenges, job losses, and health concerns aggravated by the COVID-19 pandemic. In the process, they claimed Social Security benefits very early and got locked into lower monthly income figures for life.
The Social Security Administration (SSA) stated that claiming benefits at 62 could lower payouts by 30% compared to those claiming at the full retirement age (FRA), which is 67 for those born after 1960.
Furthermore, the US Federal Reserve's record monetary tightening campaign, which drove inflation and living costs to record highs, also became a major reason why retired Americans are returning to the workforce. T-Rowe Price's recent study revealed that almost 20% of Americans are unretired, most citing financial and social challenges.
With US inflation notching to 2.7% in November from 2.6% in the preceding month, one in six US retirees are expected to return to work. But did you know that if you continue to earn from work after claiming Social Security and are below your FRA, your monthly checks could be slashed significantly?
Earnings-test Income Limit In Retirement
Although your Social Security check size is primarily determined by factors like your contributions in your working years and the age when you claim them, income from working part-time or full-time in retirement also decides your final benefit payout.
If you claim Social Security checks before hitting the FRA and still work, your wages will be subject to the retirement earnings-test income limit. Social Security beneficiaries earning over £18,572 ($23,400) annually from jobs see their benefits reduced by £0.79 ($1) for every £1.59 ($2) earned over the limit.
Let's say you earn £23,811 ($30,000) annually from jobs and are two years away from your FRA of 67. Per the Social Security rules, your wages exceed the annual income limit of £18,572 ($23,400) by £5,238 ($6,600). Hence, your annual Social Security benefits will drop by £2,619 ($3,300) or £218 ($275) monthly. However, note that benefits will be reduced only up to the year of the FRA.
Meanwhile, the income limit for jobs increases to £49,337 ($62,160) annually for Social Security claimants who have reached FRA. Their benefits drop by £0.79 ($1) for every £2.38 ($3) earned over the threshold.
Benefits Reduction Doesn't Mean Your Overall Payouts In Retirement Decline
It is true that high job income after claiming Social Security can drastically reduce monthly benefit checks until you reach the FRA. Sometimes, the government can withhold the entire Social Security payout if wages from jobs are too high.
The SSA estimated a £793 ($1,000) monthly income could drop to £519 ($655) after earnings-test reductions. However, the monthly payments will be adjusted to £849 ($1,070) upon reaching FRA.
Nonetheless, when payouts are adjusted at FRA, you receive bigger checks for life since the retirement earnings test was designed to ensure claimants recoup all withheld benefits. The benefit reductions can be extreme in the short term, but you don't miss out on anything, considering you spend a few decades in retirement.
