Planning for Earned Income in Retirement

Planning for Earned Income in Retirement

Core Facts

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Most people these days are not going to achieve the sort of lifestyle that was envisioned for retirement even a decade ago. The type of expectations that were the norm, like being able to simply go golfing or playing tennis every day and sipping pina coladas as the sun goes down is now almost a pipe dream for many. Rather, retirement will mean relaxing and working. Because of the fact that things have changed, many folks now retire from their regular job and then start a business of their own or work part time, so that they are keeping busy as well as bringing home a little extra bacon. However, if a person is working after they start receiving Social Security retirement benefits, the earnings may affect the amount of the benefit check that they are
entitled to.

The monthly amount due from a person’s Social Security retirement benefit is based on the individual’s lifetime earnings. At age 62, the Social Security Administration (SSA) calculates their primary insurance amount (PIA) upon which retirement benefits will be based. Later, that PIA will be recalculated annually if they have had any new earnings that might substantially increase their benefit. So continuing to work after starting to receive retirement benefits may eventually increase the PIA and thus retirement benefit.

Something to be aware of, however, is if income is earned over a certain limit by working after beginning to receive retirement benefits, the benefit may be reduced proportionately. This limit, known as the retirement earnings test exempt amount, affects only beneficiaries under normal retirement age. The benefit reduction is based on annual earnings and is not permanent; the monthly benefit is reduced starting in January of the year following the year excess earnings were recorded and will be reduced until the excess earnings are used up.

Example(s): Emily is entitled to a Social Security retirement benefit of $800. When she was 64, her annual earnings exceeded the retirement earnings test exempt amount, so her benefit was reduced by $600. Consequently, in January of the following year, she received only a $200 monthly benefit check ($800 minus $600 equals $200). However, in February, she again received an $800 monthly benefit check.

Top Tip: If the monthly benefit is reduced in the short term due to new earnings, receiving a higher monthly benefit later is guaranteed. That's because the SSA recalculates a person’s benefit when they reach full retirement age and omits the months in which their benefit was reduced.

In 2015, the annual exempt amount is $15,720 ($15,480 in 2014) for beneficiaries under normal (full) retirement age. However, in the year full retirement age is reached, a different limit applies. The limit in 2015 is $41,880 ($41,400 in 2014), which applies to earnings up to, but not including, the month that they reach normal retirement age.

If under normal retirement age, $1 in benefits is withheld for every $2 of earnings in excess of the annual exempt amount.

Example: Ida was a self-employed potato farmer. After she began receiving Social Security retirement benefits at age 62, she continued to sell potatoes at her produce stand outside of Boise. Since she exceeded the annual retirement earnings test exempt amount by $380, $190 was withheld from her benefit check the following January.

In the year normal retirement age is reached, $1 in benefits is withheld for every $3 of earnings in excess of the special exempt amount that applies that year but only counting money earned before the month that the individual reached normal retirement age.

Example: In the year that Ida reached normal retirement age, she earned $3,200 more than the special earnings limit that applies in that year. However, she earned $500 of that after she had reached normal retirement age, so that amount wasn't counted in calculating how much benefit would be withheld. Instead, the remaining $2,700 was used in the calculation, and $900 was withheld from Ida's benefit ($1 for every $3 in excess of the earnings limit).

Earnings that might reduce your benefit

  • Wages earned as an employee (counted for the taxable year they're earned)
  • Net earnings from self-employment (usually counted in the year earnings are received)
  • Other types of work-related income, such as bonuses, commissions, and fees

Earnings that won't reduce your benefit

  • Pensions and retirement pay
  • Workers' compensation and unemployment compensation benefits
  • Prize winnings from contests, unless part of a salesperson's wage structure, or entering contests is the person’s "business"                                            
  • Tips that are less than $20 a month                                              
  • Payments from individual retirement accounts (IRAs) and Keogh plans                             
  • Investment income                                  
  • Income earned in or after the month normal retirement age is reached.

Other types of earnings may affect the benefits enjoyed by a retired person. Additional
questions about how the Social Security Administration defines earnings, contact the SSA
at (800) 772-1213.

Which benefits may be affected by excess earnings?

Social Security retirement benefits may be reduced if income is earned over the retirement earnings test exempt amount. So be careful about adding it all up as even a single dollar can change everything.                                  

Benefits paid to a person’s spouse or child

Given the fact that any excess earnings may reduce the benefits a spouse and/or child receives based on their Social Security record, it is advisable to be aware of the consequences of earning any extra income and what impact it will have on the lives of loved ones. In addition, any excess earnings they have may reduce their own benefits. It can get rather complicated and needs quite a bit of math and an awareness of the rules and regulations. Be sure to get it all in order, or the people that matter might be in for a rude awakening.

Example(s): Bill is 63 and receives a Social Security retirement benefit. His wife Betty, who is also 63, receives a retirement benefit based on Bill's earnings that is equal to 50 percent of Bill's benefit. If Bill earns $200 over the retirement earnings test exempt amount, his benefit is reduced by $100 ($200 divided by 2) the following January. Betty's benefit is reduced by 50 percent of that amount, or $50.                      

However, assume that Betty also works and earns $200 over the retirement earnings test exempt amount. Her benefit will be reduced by $100 ($200 divided by 2). Her benefit is reduced an additional $50 by Bill's excess earnings. Bill's benefit, however, is reduced by $100 because of his own excess earnings but is not affected by Betty's excess earnings.                                              

Benefits paid to survivors        

If an individual were to die and a member of the family receives a survivor's benefit, that benefit may be reduced if the family member earns money in excess of the retirement test exempt amount.          

Example(s): When Bill dies, Betty, his widow, begins receiving survivor's benefits based on Bill's Social Security record. Since she earns $200 more than the exempt amount that year, Betty's survivor's benefit of $825 is reduced by $100 in January of the following year.                                             

Earnings from an employer       

While all of these examples are important knowledge, there is more to it than meets the eye. For the inaugural year of retirement, the earnings test is applied differently than in later years. Normally, the earnings test is based on the amount of income that was earned annually, however, in the first year of retirement, the earnings test can be based on the amount of income earned monthly. Be aware that it is possible to receive a full Social Security benefit check for any whole month in which earnings don't exceed 1/12th of the annual exempt amount.                                 

Example(s): Caleb retired on July 31 at age 62. From January through July of that year, he earned $40,000. After he retired, he began working part-time and earned only $300 a month from August to December (each month, less than the monthly earnings exempt amount). Thus, even though his annual earnings during the year he retired greatly exceeded the annual earnings exempt amount, Caleb's benefit check was not reduced the following year.

Earnings from self-employment               

Self-employed people have a slightly different set of rules and circumstances that apply to them. If self-employment is the path that a retiree chooses to follow to keep themselves busy or supplement their income, the SSA also considers whether or not substantial services in the business have been performed.  For any month not substantially self-employed, full benefits will be received. In general, it is considered that a person is substantially self-employed if they worked as a self-employed person more than 45 hours in one month. If less than 15 hours are worked in one month, they are not considered substantially self-employed and probably will receive full retirement benefit for that month. The grey area lies in the possibility that a person works between 15 hours and 45 hours a month, in which case that person may or may not be considered substantially self-employed by the SSA, and the retirement benefit may be affected.                                  

Time your post-retirement earnings        

It is possible to try and time when post-retirement earnings are paid out. If there is a chance that substantial earnings are available after retirement but normal retirement age has not yet been reached, it may be a good idea to time it correctly to prevent withholding of all or part of the Social Security retirement benefit payout. This leaves more control in the hands of the recipient and their loved ones and beneficiaries rather than at the whim of the authorities controlling the money available.                                 

Create a self-employment loss        

This can be a tricky one but the fact is that self-employment can mean that there is a way to generate a self-employment loss to offset excess self-employment income. Look into the ins and outs of it properly and get professional advice, so that all the legal parameters are followed.                                  

Incorporate a sole proprietorship                            

An excellent way of making sure that self-employment earnings are kept to a minimum is incorporating a sole proprietorship as an S corporation. This is one way where an individual may be able to reduce self-employment earnings by receiving profit distributions. These will not be considered self-employment income for the purposes of the retirement earnings test, and the monthly income gets factored into the corporation rather than appearing in a personal account.                                 

Shift earnings to others                           

It is possible to reduce net self-employment earnings if a person shifts earnings to others by forming a partnership with a spouse or employing children.                                  

Caution:  The SSA may scrutinize questionable retirement arrangements. Under the law, families are entitled to work and combine Social Security benefits and earnings in such a way as to get the most income that they can. However, DO NOT understate earnings or establish fictitious business arrangements.                                             

Questions & Answers

Q: If you earn more than the retirement earnings exempt amount, when will all or part of your benefit be withheld due to excess earnings?                            

A: Your excess earnings will be withheld starting in January of the year following the year you had excess earnings.                                

Q: If you receive Social Security retirement benefits based on your ex-spouse's Social Security earnings record, will your benefit be reduced if your ex-spouse works after retirement and earns more than the exempt amount?

A:No. If you've been divorced for more than two years, your benefits will not be reduced if your ex-husband has excess earnings. The only way your benefit will be reduced is if you have excess earnings.

Q:  How does the SSA know how much you earn after you retire?

  A: The SSA knows how much you earn because you are required to estimate your earnings when you apply for Social Security benefits. Later, the SSA will get information about your earnings from your IRS W-2 form (submitted annually by your employer) or, if you are self-employed, from your annual income tax return. They also may ask you to send them an earnings estimate annually. In addition, if you think the earnings used to calculate your benefit may be incorrect, contact the SSA at (800) 772-1213, so that your benefit can be accurately calculated.


Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities.

To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable-- we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

Some of this material has been provided by Broadridge Investor Communications Solutions, Inc.

David Lerner Associates does not provide tax or legal advice. The information presented here is not specific to any individual's personal circumstances.

Member FINRA & SIPC.


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Founded in 1976, David Lerner Associates is a privately-held broker/dealer with headquarters in Syosset, New York and branch offices in Westport, CT; Boca Raton, FL; Teaneck and Princeton, NJ; and White Plains, NY. For more information contact David Lerner Associates Call 516-921-4200 Visit our website:

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516.829.8374 X 232

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