You have worked your whole life for this moment: retirement. And since you paid into Social Security all those years, you may think you now have enough to live on. But, unfortunately, Social Security doesn’t cover all your living expenses. And it won't help you with a prosperous retirement.
Working Will Impact Pre-FRA BenefitsThere are two scenarios to working while collecting Social Security benefits. One is to receive Social Security before full retirement age (FRA), and the other is to wait until after FRA.
If you elect to draw Social Security before you reach FRA, there are some limitations as to how much you can earn outside of Social Security. In other words, you will be penalized if you make too much, based on the Social Security Administration's (SSA's) criteria.
Penalty for Making Too Much Before FRAYou can begin drawing Social Security benefits as young as age 62 (or earlier if you're a widow/widower or disabled). However, if you’re younger than retirement age, there are limits on how much you can earn aside from Social Security. Money will be deducted from your Social Security benefits, based on how much you earn over a designated amount. For example, the maximum amount you can earn for 2022 is $19,560 yearly.
For instance, if you were born in 1960 or later, you will not reach FRA until you’re 67. You will be penalized if you work over the maximum amount. This penalty is one dollar from your benefits for every two dollars you earn over the $19,560.
For instance, you file for benefits, and your payment is $7,200 yearly. But if you earned $23,920, which is $4,360 above the limit, Social Security would withhold $2,180 of your benefits.
Working After FRA and Drawing Social SecurityThere is no limit to how much you can earn on top of Social Security benefits, starting with the month you reach full retirement age. You might even have a higher benefit.
If you continue working after FRA, you will probably continue to pay into Social Security while collecting it. Every year, the Social Security Administration reviews recipients who work. They calculate based on whether these earnings are your highest years of income. They then refigure your benefit and pay any increases due.
You don’t have to notify Social Security; this should be automatically done. The adjusted benefit is paid in December of the following year.
Don’t Rely on Social SecurityIn December of 2020, 46.7 million individuals aged 65 or older, or nine out of ten, were receiving Social Security benefits. But how secure is Social Security? According to a 2021 Social Security Trustees report, by 2034, retirees will start experiencing reduced benefits. The Trustees’ report says that retirees will only have around 77 percent of their former benefits. This is because Congress hasn’t addressed the Social Security crisis since the 1980s.
How Big Should Your Nest Egg Be?You can’t rely on Social Security, but you can rely on yourself.
When planning for retirement, you should hire a sound financial advisor. Even if you've already established a nest egg, making sure it grows and is there for you when you retire is imperative. A sound advisor can help you.
Discuss the four percent rule with your advisor. This rule was developed for retirees in the 1990s by financial advisor William Bengen. He based it on 50 years of stocks and bonds returns. And although it needs to be tweaked somewhat for today’s economy, it’s still valid. The premise of the rule is to plan on withdrawing four percent of your retirement fund for living expenses every year.