Know Your Benefits: How Working Can Impact Your Social Security Benefits

There was once a time when “retirement” and “no longer working” were the same. That’s not the case anymore. A Pew Research survey found that nearly one-fifth of Americans aged 65 and older were employed in 2023.^[1] According to an analysis from Bain & Co., employees 55 and older will make up over a quarter of the global workforce by 2031.^[2]

Deciding when and how to take your Social Security retirement benefits can be challenging, particularly when you wish to continue to work while collecting those benefits. To complicate matters, the answer to “When is the right time for me to claim my benefits?” is likely “It depends.”

Below, we’ll discuss what happens if you continue to work while receiving Social Security before and after your full retirement age (FRA). (Your personal full retirement age depends on the year you were born. If you were born in or after 1960, the full retirement age is 67. If you were born before 1960, click here^[3] to see your full retirement age.)

Social Security Retirement Benefit Reduction

Electing to start receiving Social Security while continuing your employment or earning self-employment income may significantly impact your monthly Social Security benefit. Whether or not your benefits will be reduced depends upon the annual income you are expected to earn over the Social Security Administration’s (SSA) annual income.

Claiming Social Security Benefits Before Reaching Your Full Retirement Age

Claiming your Social Security benefits (beginning at 62) while continuing your employment before you’ve reached your FRA can significantly impact your already reduced benefits. By electing to take Social Security before your FRA, your benefit is reduced by a maximum of 30%. Each month, the reduction in your benefits will decrease until you reach your FRA.

If you are under full retirement age for the entire year, the SSA deducts $1 from your benefit payment for every $2 you earn above the 2024 annual limit of $22,320. In the year you reach full retirement age, the SSA will deduct $1 in benefits for every $3 you earn above $59,520. Your earnings are only counted up to the month before you reach your full retirement age, not your earnings for the entire year.

Example: Working on Social Security Before Full Retirement Age

John is 62 and files for Social Security ($600 monthly). He plans to continue working and is expected to earn $5,000 over the annual earnings limit. John will not receive any Social Security from January through May to reflect his excess earnings, and his benefits will begin in June.

The following year, John will receive an additional $500 to account for the Social Security Administration’s over-withholding from the prior year. (This calculation comes from SSA withholding $3,000 [$600 monthly benefit x 5 months] and then subtracting the actual benefit reduction of $2,500 [$5,000 divided by 2], resulting in a $500 excess withholding from the SSA.)

Example: Working on Social Security The Year You Reach Full Retirement Age

Paulina is 66 (she will reach full retirement age of 67 in November) and files for Social Security ($600 monthly). Paulina plans to continue working and is expected to earn $1,200 over the annual earnings limit. In January, Paulina will not receive any Social Security to reflect her excess earnings, and her benefits will begin in February.

The following year, Paulina will receive an additional $200 to account for the Social Security Administration’s over-withholding from the year prior. [This calculation comes from SSA withholding $600 ($600 monthly benefit x 1 month) and then subtracting the actual benefit reduction of $1,200, resulting in a $200 excess withholding from the SSA.]

Claiming Social Security Benefits After Reaching Your Full Retirement Age

Claiming Social Security after reaching your full retirement age while maintaining employment has no adverse impact on the benefits you’re eligible to receive, no matter how much income you earn during those years. (If you started taking Social Security before your FRA and there were months you did not receive a benefit because your income was over the annual limit, the SSA will credit your benefit with those reductions and increase your monthly benefit.)

If you continue to work while claiming Social Security benefits after reaching FRA, you may be entitled to an increase in your annual benefit amount. The SSA will look at your earnings each year, and if your earnings are higher year over year, you could see an increase in your monthly benefits. To ensure a correct calculation and projection of your monthly benefits, visit your local Social Security office.

Example: Missed Months of Social Security Benefits

George filed for Social Security at 62, continued working, and has reached his FRA. During the past five years, there were 24 months that he did not receive his Social Security benefits because of the income reduction. Now that George has reached 67, the SSA will credit Bill for the months missed and increase his future monthly benefits accordingly.

Your Social Security Benefits and Income Taxation

One prevalent misconception about Social Security benefits is that they are not subject to taxes. Your Social Security is, in fact, taxable. About 40% of people who receive Social Security pay income taxes on those benefits.^[4] However, the amount of your benefits subject to federal taxes depends on your filing status and income.^[5]

The table below shows the taxable portion of Social Security for an individual and married filing jointly tax status.

Example: Benefits for a Married Couple

Richard and Barbara Starkey are married and have an Adjusted Gross Income and Nontaxable Interest of $21,500, plus combined Social Security of $45,000. Based on their combined income, $22,500 of their Social Security will be subject to federal income tax ($45,000 x 50%). Remember, this is the income included as part of their taxable income and subject to taxes at their marginal^[7] tax rate, not the actual tax they owe.

Conclusion

When to claim your Social Security benefits and whether you’ll continue to work while receiving benefits is a profoundly personal decision only you can make. There are a lot of factors to consider, and in the end, you only know what you need. If you have questions about when you should start to collect your Social Security benefits or would like some insight on planning for a future with partial or full Social Security benefits, get in touch with an advisor at Sequoia Financial Group. We’re here to help you plan for the future you deserve.

Sources:

1. https://fortune.com/well/2024/01/26/benefits-older-employees-workforce-retention-burnout-experience-inclusivity/
2. https://fortune.com/well/2024/01/26/benefits-older-employees-workforce-retention-burnout-experience-inclusivity/
3. https://www.ssa.gov/benefits/retirement/planner/agereduction.html
4. Based on figures from the 2022 Retirement Benefits brochure published by the Social Security Administration
5. Combined income = Adjusted Gross Income (AGI) + Nontaxable Interest + ½ of your Social Security benefits
6. 85% is the maximum amount of your benefit that is subject to taxes
7. The marginal tax rate is how much your next dollar of earnings is taxed and is at your highest bracket, while the effective tax rate is just the average tax rate you pay and is lower than the marginal tax rate.