Finance

Does my pension income count as income for social security?

Published

2 weeks ago

June 20, 2024

Man looking at taxes from his social security

Deciding when to receive Social Security benefits is one of the most important questions you’ll need to answer when planning your retirement strategy. Second is understanding what could increase or decrease your benefit amount. Does the pension income count as income for social security? No, but working while claiming benefits may reduce the amount you can collect. Talk to one Financial Advisor can help you maximize Social Security benefits in retirement.

Understanding Social Security Benefits

Social Security Retirement benefits are intended to provide a supplemental source of income to eligible seniors. You can start receiving retirement benefits as early as age 62, although this may reduce the amount you receive. Waiting until age 70 to receive benefits in the meantime could increase your benefit amount.

Benefits are calculated based on your income history. In particular, social security takes into account earned income, wages and net income from self-employment. If money is withheld from your wages for Social Security or FICA taxes, then your wages are covered by Social Security since you are paying into the system.

When you apply for benefits, Social Security uses your average indexed monthly earnings to decide how much you qualify for. This average is based on up to 35 years of your indexed income and is used to calculate your Primary Insurance Amount (PIA). The PIA determines which benefits you will receive when you retire.

Does the pension income count as income for social security?

Retirement income does not count as income for Social Security purposes and does not affect your benefit amount. Specifically, the Social Security Administration excludes the following from income:

None of these are considered income for Social Security purposes. Again, Social Security only looks at money you actually earn by working or being self-employed. That means you can collect Social Security benefits and make withdrawals from a 401(k) or an individual retirement account (IRA) or receiving payments from an annuity. Reverse Mortgages also does not affect your Social Security benefits or your eligibility for Medicare.

With a reverse mortgage, you tap into your home equity, but instead of making payments to a lender, the lender makes payments to you. As long as you live in the home, you do not have to pay anything back on the reverse mortgage. Many retirees choose to supplement Social Security benefits with a reverse mortgage.

Does Working in Retirement Reduce Social Security Benefits?

Financial advisor explaining someone's Social Security tax obligation — Financial advisor explaining someone’s Social Security tax obligation

Working while also receiving Social Security benefits may lower your monthly payments depending on your age and income.

Under Social Security rules, you are considered retired once you receive benefits. If you are under full retirement age but still working, Social Security can deduct $1 from your benefit payments for every $2 you earn above the annual limit. For 2023, the limit is $21,240.

In the year that you have your full retirement age (FRA), changes the deduction to $1 for every $3 earned above another annual limit. For 2023, the limit is $56,520. Once you reach your full retirement age, your benefits will no longer be reduced, regardless of how much you earn. Social Security will also recalculate your benefit amount so that you get credit for the months in which your benefits were reduced because of your earnings.

Coordinating pension withdrawals and social security

Deciding when to receive Social Security benefits starts with considering your other sources of retirement income. This could include, for example:

You could also have one health savings account (HSA) here, even though it’s not technically a retirement account. An HSA can help you save money on healthcare costs in a tax-advantaged manner, but once you turn 65, you can withdraw money for any reason without a tax penalty. However, you pay ordinary income tax on the benefit.

From a tax perspective, it usually makes sense to start with taxable accounts first, then with tax-advantaged withdrawals, leaving the Roth and Roth-designated accounts last. By doing this, you allow your Roth investments to continue to grow tax-free until you need them.

In terms of when to start receiving Social Security benefits, delaying usually makes sense if you’re hoping to get a larger payout or if you have other sources of income you can rely on. You can also choose to defer benefits if you plan to continue working until your full retirement age. You may then be able to claim a larger benefit amount.

A financial advisor can help you create an efficient plan for coordinating your retirement income. Get matched with a fiduciary financial advisor.

Creating multiple income streams for retirement without affecting social security

Since retirement income doesn’t count as income for Social Security purposes, it can be to your advantage to have more than one source to rely on. You may already be contributing to your 401(k) at work, but you can add an IRA to the mix for additional savings.

Whether it makes sense to choose one traditional or Roth IRA may depend on where you expect to be fiscally once you retire. You may choose a traditional IRA if you expect to be in a lower tax bracket later, but can benefit from claiming deductible contributions now. On the other hand, a Roth IRA may be preferable if you want to be able to withdraw money tax-free in retirement.

An annuity is another option if you want to invest money now to generate a guaranteed income later. When considering an annuity, it’s important to know how different types of annuities work and what they may cost.

Real estate can be another option if you’re looking for a passive income option that won’t impact your Social Security benefits. You could buy a rental property or become a pinball player, but owning real estate directly is not a requirement. You can also create passive investments income through real estate investment trusts (REITs), real estate crowdfunding platforms or real estate investment trusts.

Talk to one Financial Advisor can give you a better idea of how to create multiple income streams for retirement without impacting your Social Security benefits. An advisor should also be able to help you formulate a strategy to get the most benefits for yourself and your partner when you are married.

In short

Retirement income does not affect your Social Security benefits, but working income does. If you plan to use social security while working, it is useful to know what this could mean for the payment of your benefits. Start saving and investing early pension you can postpone social security benefits so that you can claim a larger benefit.

Retirement planning tips

Working with a financial advisor can help you refine your retirement plan. Finding a financial advisor does not have to be difficult. SmartAsset’s free tool connects you with up to three vetted financial advisors serving your area, and you can have a free introductory meeting with your advisors to decide which one you think is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, start now.
Social benefits are taxable for retirees who have significant income from wages, self-employment, interest and dividends. If you work while claiming benefits or earning interest and dividend income, you may have to pay taxes on some of your benefits, depending on how much income you have.
Check out our free pension calculator for a quick estimate of what to expect based on your age, expected retirement and sources of income.
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