How Much Can You Make If You Retire at 65?

Retiring at age 65 marks a significant financial transition, shifting from regular employment income to drawing from accumulated resources. Individuals entering this phase typically combine various income streams. Understanding these potential sources is fundamental for securing financial well-being throughout retirement.

Social Security Income

Social Security benefits are a foundational income source for many retirees, with the amount influenced by several factors. For individuals born between 1943 and 1959, the full retirement age (FRA) is 66, gradually increasing to 67 for those born in 1960 or later. Claiming at 65 may result in a slightly reduced benefit for some. The Social Security Administration (SSA) determines an individual’s Primary Insurance Amount (PIA), the benefit received at FRA, using a formula based on average indexed monthly earnings (AIME).

AIME is derived from an individual’s 35 highest-earning years, with earnings adjusted for inflation. If an individual has worked fewer than 35 years, zero earnings are factored in for missing years, which can reduce the overall benefit. The PIA calculation involves applying percentages to different tiers of the AIME, known as “bend points,” adjusted annually for inflation.

Individuals can estimate their Social Security benefits through the SSA’s website or online calculators. These tools project benefits at different ages, including age 62, FRA, and age 70. Spousal benefits are also available, allowing a spouse to receive up to 50% of the working spouse’s PIA if they meet eligibility criteria. Survivor benefits may also be paid to eligible family members based on the deceased worker’s earnings record.

Social Security benefits are subject to federal income tax depending on an individual’s “combined income,” which includes adjusted gross income, tax-exempt interest, and half of the Social Security benefits. For a single filer, up to 50% of benefits may be taxed if combined income is between $25,000 and $34,000, and up to 85% if it exceeds $34,000. For those filing jointly, these thresholds are $32,000 and $44,000, respectively.

Retirement Account Distributions

Dedicated retirement accounts serve as primary income sources for individuals at age 65, each with distinct tax implications and withdrawal rules. Distributions from traditional accounts like 401(k)s and Traditional IRAs are taxed as ordinary income because contributions were made pre-tax, and earnings grew tax-deferred. Qualified distributions from Roth IRAs are tax-free, as contributions were made with after-tax dollars, and earnings also grow tax-free. At age 65, individuals are past the age 59½ threshold, meaning the 10% early withdrawal penalty generally does not apply.

Required Minimum Distributions (RMDs) are not mandated until age 73 under current law. RMDs require account holders to begin withdrawing a specified amount from their traditional pre-tax retirement accounts annually to avoid penalties. While not immediately applicable at 65, planning for RMDs in later years helps manage future tax liabilities. An RMD is calculated based on the account balance at the end of the previous year and the account holder’s life expectancy.

Various withdrawal strategies help manage income from retirement accounts sustainably. The 4% rule suggests retirees can safely withdraw 4% of their initial retirement savings in the first year, adjusting annually for inflation. This guideline aims to ensure savings last for approximately 30 years, balancing income needs with portfolio longevity. Its applicability depends on factors like market fluctuations, risk tolerance, and portfolio composition.

Other studies suggest optimal withdrawal rates vary between 3% and 5% depending on individual circumstances and market conditions. A conservative approach might suggest a lower rate in periods of low interest rates or high stock valuations. The chosen strategy should align with a retiree’s financial goals, life expectancy, and comfort with market volatility, often requiring adjustments.

Income from Non-Retirement Investments

Beyond dedicated retirement accounts, income can also be generated from investments in taxable brokerage accounts. These sources include dividends, interest, and capital gains, each with distinct tax treatments. Dividends, distributions of a company’s earnings, can be qualified or non-qualified, affecting their tax rate. Qualified dividends are taxed at lower long-term capital gains rates, while non-qualified dividends are taxed at ordinary income rates. Interest income, from bonds, savings accounts, or certificates of deposit, is taxed as ordinary income at the individual’s marginal tax rate.

Capital gains arise from selling an investment for more than its purchase price. Short-term capital gains, from assets held for one year or less, are taxed at ordinary income rates. Long-term capital gains, from assets held for more than one year, receive preferential tax treatment with lower rates. For many retirees, these long-term capital gains rates can be 0%, 15%, or 20%, depending on their overall taxable income. Managing these strategically can help optimize tax outcomes.

Rental property income offers another potential revenue stream for retirees, providing consistent cash flow and potential for appreciation. Income from rental properties is taxed as ordinary income, but significant deductions can reduce the taxable amount. These deductions may include mortgage interest, property taxes, maintenance expenses, insurance, and depreciation. Depreciation allows property owners to deduct a portion of the property’s value over its useful life, even if the property is appreciating.

Annuities purchased with non-retirement funds can provide a guaranteed income stream, converting a lump sum into regular payments. Taxation depends on whether the annuity was funded with pre-tax or after-tax money. For annuities funded with after-tax dollars, only the earnings portion is subject to ordinary income tax, while the original principal is tax-free. The IRS generally applies a “last-in, first-out” (LIFO) rule for non-qualified deferred annuities, meaning earnings are taxed first.

Income from Continued Employment

Many individuals choose to continue working after age 65 to supplement retirement income and maintain financial flexibility. Part-time jobs provide a steady paycheck without full-time demands, allowing retirees to balance work with leisure. Consulting offers a popular avenue for retirees to leverage professional experience and expertise, often with flexible hours. Freelancing or starting a small business also provide autonomy and control over one’s work schedule and income potential.

Income from continued employment is subject to income tax. If self-employed, individuals also pay self-employment taxes, covering Social Security and Medicare contributions. Self-employment tax is 15.3% on net earnings, consisting of 12.4% for Social Security and 2.9% for Medicare. This earned income can enable individuals to delay claiming Social Security benefits, potentially increasing future monthly payments.

For individuals below their full retirement age (FRA), earning income can impact Social Security benefits. If earnings exceed certain annual limits, a portion of benefits may be temporarily withheld. Once an individual reaches their FRA, these earnings limits no longer apply, and they can earn any amount without a reduction in Social Security benefits. For someone whose FRA is 66 or 67, earning income at age 65 might still be subject to these limits, but this resolves upon reaching FRA.

Many self-employed retirees can utilize tax-advantaged retirement accounts designed for small business owners, such as a Solo 401(k) or a Simplified Employee Pension (SEP) IRA. These plans allow for significant contributions, reducing taxable income while building further retirement savings.