For many older adults, Social Security is crucial for a comfortable retirement. However, a recent survey found that 55% of U.S. adults admit their benefits aren’t enough to cover basic needs.
A new study from T. Rowe Price reveals that 20% of retirees work part-time or full-time, often due to financial reasons. Working in retirement can create financial stability, but it may also reduce Social Security benefits.
The key concept to understand is the retirement earnings test, an income limit that could reduce benefit amounts if certain conditions are met. To be subject to this limit, you must:
1. Be collecting Social Security benefits or spousal benefits.
2. Be under full retirement age (FRA).
3. Earn an income from a job.
If your income surpasses the threshold, a portion of your benefits will be temporarily withheld. The higher your earnings, the larger the benefit reduction.
In 2025, thresholds will increase, allowing more earning before reductions. There are two limits:
1. For those under FRA: $22,320 per year (increased from $23,400 in 2024) with a $1 reduction for every $2 over the limit.
2. For those reaching FRA this year: $59,520 per year (increased from $62,160 in 2024) with a $1 reduction for every $3 over the limit.
For example, if you reach your FRA at 66 and earn $60,000 before your actual FRA, the 2024 limit would have been exceeded. However, starting in 2025, your earnings will fall below the new limit, avoiding reductions.
While higher earnings limits might seem beneficial, it’s essential to note that these withholdings can be significant in the short term but may not impact lifetime income much. The Social Security Administration will recalculate payments once you reach FRA, ensuring a larger benefit for the rest of your retirement.
By understanding these changes and staying up-to-date on earnings test limits, older adults can head into 2025 with more financial stability and preparedness for their retirement.
Source: https://www.fool.com/retirement/2024/12/21/1-social-security-change-in-2025-every-worker-need