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A combination of record prices and record number of job openings is encouraging more retirees to return to work. The trend, called “exit,” recovered to pre-pandemic levels this spring.
According to a recent CNBC All-America Workforce Survey, about two-thirds, or 68%, of retirees would consider returning to work. The pandemic has prompted many people to retire sooner, with 62% of retirees saying they left the workforce earlier than planned and 67% saying they left at least two years early.
In addition, 42% of respondents in a Nationwide Retirement Institute survey said they plan to apply for Social Security early and continue working, up from 36% in 2021.
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The job opportunities are there: although there were fewer vacancies in June, there were still 1.8 vacancies per available employee.
But if you’re already receiving Social Security retirement benefits, there are a few things you need to know before you start earning salary again.
Social Security beneficiaries who return to work may earn more in the short term and may eventually increase their monthly benefit checks, according to Joe Elsasser, founder and president of Covisum, a provider of Social Security claiming software.
But in the short term, they may be subject to benefit changes that are worth planning for. “That’s the surprise people want to avoid, not knowing that the profit test is going to happen and they’re going to be fined,” Elsasser said.
Here are a few things to know before you retire.
Notify Social Security about your return to work
If you plan to return to work, notify the Social Security Administration immediately, Elsasser advised. That way, the agency can now start reducing your checks.
If you don’t, you could be in for a nasty surprise early next year when the IRS reports your earnings to the Social Security Administration.
If that happens, you may receive an unexpected letter from the Social Security Administration stating that they will stop your benefits immediately until any pay penalty from the previous year has been caught.
That can disrupt your cash flow if you don’t expect it.
Income fine can temporarily lower benefits
If you are older than your full retirement age, there is no wage penalty when you return to work.
“They can earn as much as they want and be able to collect Social Security checks,” Elsasser said.
The full retirement age is usually 62 to 67 years, depending on your year of birth. The Social Security Administration’s retirement age calculator can help you figure out the age at which you qualify for full benefits.
If you are between 62 and full retirement age and return to work after applying for benefits, you will be subject to a wage penalty, which consists of two levels.
Below the first tier, you can earn up to $19,560 penalty-free in 2022. For every $2 you earn above that limit, $1 is reduced from your Social Security benefit.
The second level applies to the year you reach full retirement age. In that year, for the months before your full retirement age, $51,960 in income is exempt from 2022.
“In the calendar year that you reach full retirement age, you really have a lot more flexibility to work and have an income, and the penalty is less too,” Elsasser said.
Even if the payment for the wage penalty is reduced, those who go back to work can still earn more in the short term and later if the benefit is increased.
Your allowance check may be larger later on
If you get the wage penalty, your benefit will be recalculated later and that can mean a bigger monthly check.
Take someone with a $2,000 Social Security check, who went back to work and made $40,000. Based on the wage penalty, according to Elsasser, they might not get a Social Security check for the first five months of the year, but they would receive their $2,000 benefit in the remaining months.
Once that employee reaches full retirement age, the Social Security Administration adds up the months they haven’t received benefit checks because of the wage penalty. It will then adjust the employee’s benefits as if they had claimed later to account for that time.
Ultimately, their benefits are increased as if they had deferred benefits, Elsasser said.
“That’s the most important thing to remember: it’s not a tax,” Elsasser said of the profit penalty; “benefits are not lost; your benefit is recalculated when you reach full retirement age.”