By AnnaMarie Mock, CFP®
Will continuing to work after reaching your full retirement age and electing to receive social security benefits increase your future social security benefits? That depends on your history of earnings.
Maximum Taxable Earnings
An individual's Social Security benefit is based on the 35 highest years of earned income, capped by the maximum taxable earnings per year. The Social Security Administration (SSA) adjusts the maximum taxable earnings for inflation every year. The maximum taxable earnings are the number of earnings that are subject to the social security payroll tax. For 2023 it is $160,200, and back in 2015, it was $118,500. Each year is a separate calculation to determine what percentage of the maximum taxable earnings you earned.
What Will Your Percentage of Maximum Taxable Earnings be in your Current Position?
Suppose your historical earnings included annual calculations when you only earned 25% of the maximum taxable earnings and other years when you earned 100% or more of the maximum taxable earnings. If your current earnings are considerably greater than 25% of the maximum taxable earnings ($160,200/ 25% = $40,050), your current income calculation will replace the lower-income years. Although the increase may not be significant, the additional benefit will also grow with the annual cost of living adjustment to add up over time.
Alternatively, suppose you earned 100% of the maximum taxable income for each of the 35 years, or your current earned income calculation is lower than your previous lowest annual calculations. You will not receive any additional social security benefits from working after electing to receive benefits.
There are a few additional items to consider before heading back to work in retirement.
Medicare premiums are based on household modified adjusted gross income from two years prior, i.e., 2021 income will affect 2023 premiums. Your Medicare premiums for the year may increase if household income exceeds certain thresholds under the Income Related Monthly Adjustment Amount (IRMAA). Refer to the chart below. The standard Medicare monthly premium for 2021 is $148.50 for single filers earning less than $88,000 and $176,000 for married filing jointly. As income increases, a surcharge is added to the standard rate making the medical insurance more costly.
You may want to defer collecting social security or reconsider the net effect of working while collecting social security to avoid the IRMAA surcharge if household income is significantly higher.
2. Increased income may make more of your Social Security benefits taxable. The amount of your social security benefits that are subject to tax depends on your annual income. The (SSA) looks at "combined income" to determine what percentage of your benefit is taxable. For example, 50% of your social security benefit will be included as taxable income if your "combined income" is between $32,000 and $44,000 if you are married and filing jointly or between $25,000 and $34,000 if filing singly. As your income hits the next bracket, 85% of the social security benefit is taxable, which is the ceiling percentage.
You can speak with your local SSA office to discuss this and any other factors to consider when selecting the optimal strategy. Here's the link to locate the nearest office to you.
Please reach out to your HIGHLAND team if you have any questions or want to review your benefits.
Author’s Bio
AnnaMarie Mock is a CERTIFIED FINANCIAL PLANNER™ and Partner at HIGHLAND Financial Advisors, LLC, a Fee-Only financial planning firm that offers comprehensive financial planning, retirement planning, employer retirement planning, and investment management. AnnaMarie graduated from Montclair State University with a degree in finance and management and successfully passed the CFP® national exam in 2016. She has been working at Highland Financial Advisors since 2013 as a fee-only, fiduciary Wealth Advisor and is a member of NAPFA.