Deciding when to receive Social Security benefits is one of the most important questions you’ll need to answer when planning your retirement strategy. Second is understanding what could increase or decrease your benefit amount. Does the pension income count as income for social security? No, but working while claiming benefits may reduce the amount you can collect. Talking to a financial advisor can help you maximize Social Security benefits in retirement.
Understanding Social Security Benefits
Social Security retirement benefits are intended to provide a supplemental source of income to eligible seniors. You can start receiving retirement benefits as early as age 62, although this may reduce the amount you receive. Waiting until age 70 to receive benefits in the meantime could increase your benefit amount.
The benefits are calculated based on your earnings history. In particular, social security takes into account earned income, wages and net income from self-employment. If money is withheld from your wages for Social Security or FICA taxes, then your wages are covered by Social Security since you are 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 income and is used to calculate your Primary Insurance Amount (PIA). The PIA determines which benefits you will receive when you retire.
Does the pension income count as income for social security?
Retirement income does not count as income for Social Security purposes and does not affect your benefit amount. Specifically, the Social Security Administration excludes the following from income:
None of these are considered income for Social Security purposes. Again, Social Security only looks at money you actually earn by working or being self-employed. That means you can receive Social Security benefits while also making withdrawals from a 401(k) or individual retirement account (IRA) or receiving payments from an annuity. Reverse mortgages also do not affect your Social Security benefits or your eligibility for Medicare.
With a reverse mortgage, you tap into your home equity, but instead of making payments to a lender, the lender makes payments to you. As long as you live in the home, you do not have to pay anything back on the reverse mortgage. Many retirees choose to supplement Social Security benefits with a reverse mortgage.
Does Working in Retirement Reduce Social Security Benefits?
Working while also receiving Social Security benefits can lower your monthly payments, depending on your age and income.
Under Social Security rules, you are considered retired once you receive benefits. If you are under 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 another annual limit. For 2023, the limit is $56,520. Once you reach full retirement age, your benefits will no longer be reduced, regardless of how much you earn. Social Security will also recalculate your benefit amount so that you get credit for the months in which your benefits were reduced because of your earnings.
Coordinating pension withdrawals and social security
Deciding when to receive Social Security benefits starts with considering your other sources of retirement income. This could include, for example:
You can also add a health savings account (HSA) here, although this is not technically a retirement account. An HSA can help you save money on healthcare costs in a tax-advantaged manner, but once you turn 65, you can withdraw money for any reason without a tax penalty. However, you pay ordinary income tax on the benefit.
From a tax perspective, it usually makes sense to start with taxable accounts first, then with tax-advantaged withdrawals, leaving the Roth and Roth-designated accounts last. By doing this, you allow your Roth investments to continue to grow tax-free until you need them.
When it comes to when to start receiving Social Security benefits, delaying usually makes sense if you’re hoping to receive a larger payout or have other sources of income you can rely on. You can also choose to defer benefits if you plan to continue working until your full retirement age. You may then be able to claim a larger benefit amount.
A financial advisor can help you create an efficient plan for coordinating your retirement income. Get matched with a fiduciary financial advisor.
Creating multiple income streams for retirement without affecting social security
Since retirement income doesn’t count as income for Social Security purposes, it can be to your advantage to have more than one source to rely on. You may already be contributing to your 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 once you retire. You may choose a traditional IRA if you expect to be in a lower tax bracket later, but can benefit from claiming 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.
An annuity is another option if you want to invest money now to generate a guaranteed income later. When considering an annuity, it’s important to know how different types of annuities work and what they may cost.
Real estate can be another option if you’re looking for a passive income option that won’t impact your Social Security benefits. You can buy a rental property or become a flipper, but owning real estate 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 investment trusts.
Talking to a financial advisor will give you a better idea of ​​how to create multiple income streams for retirement without impacting your Social Security benefits. An advisor should also be able to help you formulate a strategy to get the most benefits for yourself and your partner when you are married.
In short
Retirement income does not affect your Social Security benefits, but working income does. If you plan to use social security while working, it is useful to know what this could mean for the payment of your benefits. If you start saving and investing for retirement early, you can delay taking out Social Security so you can claim larger benefits.
Retirement planning tips
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Working with a financial advisor can help you refine your retirement plan. Finding a financial advisor does not have to be difficult. SmartAsset’s free tool matches you with up to three vetted financial advisors serving your area, and you can have a free introductory meeting with your advisors to decide which one you think is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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Social Security benefits are taxable for retirees who have significant income from wages, self-employment, interest and dividends. If you work while claiming benefits or earning interest and dividend income, you may have to pay taxes on some of your benefits, depending on how much income you have.
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View our free pension calculator for a quick estimate of what you can expect based on your age, expected pension and sources of income.
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Have an emergency fund on hand in case you encounter unexpected expenses. An emergency fund should be liquid – in an account that is not at risk of significant fluctuations like the stock market. The trade-off is that the value of liquid cash can be eroded by inflation. But with a high-interest account, you can earn compound interest. Compare savings accounts from these banks.
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