Deciding when to take Social Security benefits is one of the most important questions to answer in planning your retirement strategy. Second to that is understanding what might increase—or reduce—your benefit amount. Does retirement income count as income for Social Security? No, but working while claiming benefits could shrink the amount that you’re able to collect. Talking to a financial advisor can help you to maximize Social Security benefits in retirement.
Understanding Social Security Benefits
Social Security retirement benefits are designed to provide a supplement source of income to eligible seniors. You can begin taking Social Security retirement benefits as early as 62, though doing so can reduce the amount you receive. Waiting until age 70 to begin taking benefits, meanwhile, can increase your benefit amount.
Benefits are calculated based on your earnings history. Specifically, Social Security considers earned 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 since 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 earnings and it’s used to calculate your primary insurance amount (PIA). The PIA determines the benefits that are paid out to you once you retire.
Does Retirement Income Count as Income for Social Security?
Retirement income does not count as income for Social Security and won’t affect your benefit amount. Specifically, the Social Security Administration excludes the following from income:
None of these are considered earnings for Social Security purposes. Again, Social Security only looks at money that you actually earn from working a job or being self-employed. That means that you could collect Social Security benefits while also taking withdrawals from a 401(k) or individual retirement account (IRA) or receiving payments from an annuity. Reverse mortgages won’t affect your Social Security benefits or eligibility for Medicare either.
With a reverse mortgage, you tap into your home equity but instead of making payments to a lender, the lender makes payments to you. You don’t have to pay anything back towards the 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?
Working while you’re also drawing Social Security benefits could reduce your monthly payments, depending on your age and earnings.
Under Social Security rules, you’re considered to be retired once you begin receiving benefits. If you’re below full retirement age but still working, Social Security can deduct $1 from your benefit payments for every $2 you earn above the annual limit. For 2023, the limit is $21,240.
In the year you reach your full retirement age (FRA), the deduction changes to $1 for every $3 earned above a different annual limit. For 2023, the limit is $56,520. Once you reach your full retirement age, your benefits are no longer reduced regardless of how much you earn. Social Security will also recalculate your benefit amount so that you get credit for any months that your benefits were reduced because of your earnings.
Coordinating Retirement Withdrawals and Social Security
Deciding when to take Social Security benefits starts with considering your other sources of retirement income. For example, that might include:
You could also add a health savings account (HSA) here, though it’s technically not a retirement account. An HSA lets you save money on a tax-advantaged basis for healthcare expenses but once you turn 65, you can withdraw money from it for any reason without a tax penalty. You would, however, 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, leaving Roth and Roth-designated accounts last. In doing so, you allow your Roth investments to continue growing tax-free until you need them.
In terms of when to take Social Security benefits, delaying usually makes sense if you’re hoping to get a larger payout or you have other sources of income to rely on. You might also consider putting off taking benefits if you plan to continue working up until your full retirement age, as that could allow you to claim a larger benefit amount.
Creating Multiple Streams of Income for Retirement Without Affecting Social…
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