Myth: It Doesn’t Pay to Work Once You Start Receiving Social Security

Category: Financial and taxes in retirement

Note: Be sure to take our new “What is Your Social Security IQ Quiz“. It will give you a score and detailed explanations to make you a Social Security expert (our best advice, read this article first!).

January 27, 2014 — We bet you have heard stories about why you shouldn’t work once you start taking Social Security. Some folks say they’ll just end up giving back what they make, while others go to great lengths to minimize their hours or even get paid under the table. But the facts are that you shouldn’t be afraid of working once you start taking your benefit, assuming you could use more income and don’t mind working. You can actually earn quite a bit without any effect on your benefit, and earn a lot with only a relatively small penalty.

The Facts M’am
Here are the rules about working and your Social Security benefits.
– Once you reach your normal retirement age (66 for most of us), you can earn as much as you want and there is no penalty at all to your benefit
– From age 62 until the year before you reach full retirement age your benefit will be reduced by $1 for every $2 you earn over the 2014 limit of $15,480 (see example below)
– In the year that you reach full retirement age your benefit will be reduced by $1 for every $3 you earn over the 2014 limit of $41,400. The penalty stops effective the month you hit full retirement age. (see example below)

Examples (From SSA.gov website)
1. You are under full retirement age all year. Assume the example of someone entitled to $800 a month in benefits. ($9,600 for the year)

You work and earn $25,080 ($9,600 over the $15,480 limit) during the year. Your Social Security benefits would be reduced by $4,800 ($1 for every $2 you earned over the limit), but you would still receive $4,800 of your $9,600 in benefits for the year. ($9,600 – $4,800 = $4,800)

2. You reach full retirement age in August 2014. Assume you are entitled to $800 per month in benefits. ($9,600 for the year)

You work and earn $62,000 during the year, with $43,410 ($2,010 over the $41,400 limit) of it in the 7 months from January through July.

Your Social Security benefits would be reduced through July by $670 ($1 for every $3 you earned over the limit). You would still receive $4,930 out of your $5,600 benefits for the first 7 months (January through July). ($5,600 – $670 = $4,930)

Beginning in August 2014, when you reach full retirement age, you would receive your full benefit ($800 per month), no matter how much you earn.


Which leads us to 2 great reasons why it is a good idea to work after you start receiving Social Security:
1. Even when your earnings exceed the limits ($15,480 until the year before full retirement and $41,400 in the year of full retirement) you are still ahead of the game. Sure, your benefits will be reduced by $1 for $2 earned or $1 for $3 earned – but you still have $1 of every $2 or $2 of every $3 that you wouldn’t otherwise have. Note – once you reach full retirement age your benefit will be recalculated to give you credit for any amounts withheld previously.

2. Your monthly benefit could be increased for the rest of your life. That’s right, if your earnings in these years are higher than some other years in your history, they will bring up your earning average and increase your monthly benefit – for the rest of your life. Particularly for people who were out of the workforce for a few years due to unemployment or illness, this could mean a substantial amount of money over the long haul.

But even better – why not delay taking benefits in the first place?
In our opinion far too many people start taking their SS benefits too early. Why not delay at least until full retirement age. By doing so you will:
– Avoid having your benefits reduced
– And more importantly, you will be increasing your monthly benefit by a lot for the rest of your life

Particularly if you can work and don’t need the money it makes a lot of sense. Likewise if you can live on other savings to supplement what you earn, delaying benefits is a good idea.

Downsides
There are 2 downsides to earning while taking Social Security benefits:
– You might have to pay more income tax on your benefits than otherwise. A joint return with combined income between $32,000 and $44,000 usually pays income tax on 50% of the SS benefit, those over $44,000 pay on 85% of the benefit, But note that that income taxes on incomes of those amounts are at a fairly low marginal rate. (see ssa.gov).
– Your Medicare premiums will go up if your joint income is more than $170,000 (but not enough to discourage you from making the extra money!).

Comments? Please share your thoughts and ideas on this topic in the Comments section below.

Posted by Admin on January 27th, 2014

25 Comments »

  1. I had to start taking SS early to pay the bills. And that has lasted a long time because it is impossible to find a job if you are over 50. The main issue I have is that if I do find a job, I cannot ‘pause’ my SS.

    by John — January 29, 2014

  2. This is a good article but I don’t think it goes far enough. What funds are considered to be money that would impact your SS? For example: I am retired military does that pension impact the SS that I can receive before my full retirement age? Do other types of pensions impact the SS received before full retirement age or do they not count them?

    by Don — January 29, 2014

  3. I plan on retiring at age 62. If I waited until age 66, “break even” point for
    the money I would lose is age 78. Also, jobs are not scarce, but jobs that pay
    anywhere close to what I was making are scarce. I can’t see giving away my talents for 50% of what I was making.

    For each individual, the situation is different. We have no mortgage, and virtually no bills outside of groceries and utilities. We are settled and
    can regularly see our families who are close by.

    Another thing that I found useful: If you are a veteran, you can receive your
    healthcare at the VA. An office visit with a doctor is $15, $50 for a specialist. Prescriptions are $9 each. If you are below the income average for the area in which you live, these services may be entirely at no cost.
    This will save you a bundle over medical insurance, and qualifies you from having to pay the “non insured” penalty under ACA, as it is considered a qualified medical plan under ACA.

    by Johnny — January 29, 2014

  4. I signed up for early Social Security yesterday. No choice since I’m unemployed. If I find a job and earn more than the limit allowed, I’ll be thrilled! I may even increase my benefit at full retirement age, if I understand that correctly. That is if I earn more than previous years’ earnings.

    Anyway, we have to do what we must.

    by Pam — January 29, 2014

  5. I will be 62 in 2 years. I am definately geting out and will take SS. Why? Because I want to do numerous things while I am physically able to.

    by Ray — January 29, 2014

  6. My husband is retiring in 6 months and will take SS at 62. He is going to maintain employment as an independent remote consultant for his prior company and will make more then the amount allowed. Since my benefits will be based on his SS, will the reduction on his SS, $1 for every$2 earned, affect my benefits

    by Denise — January 29, 2014

  7. Great article and great comments.
    One question – when referring to the $15,480 income limit, is that ‘gross’ income or ‘net’ income. I haven’t been able to find an answer.
    thanks for your help!

    by Cyn Rogers — January 29, 2014

  8. I started ss this year when I turned 64. I had found a good job when I was 60, despite comments of how there are no jobs, I got a job with NY state. Govt jobs usually don’t discriminate based onage. Not if youbtestwell and interview well. But I quit last spring because of health issues. I hope to develop some independent online work, and next year I will probably also resume working in tax senator, doing taxes. It sees to me there is no downside to working. Even with ss deductions, you still come out ahead. My hope is to work enough to save for extras, like a newer car or a vacation, but also to keep funding IRAs. I do worry about outliving ss and/or needing LTC. I’m considering LTC policy but am in transition…moving to AZ…and want to see how my budget works after my move.

    by Ginger — January 29, 2014

  9. Oh…my understanding from researching ss website is that they look at earned income…not pensions, etc. and I think they use gross earned income for the $15480 figure.

    by Ginger — January 29, 2014

  10. There are jobs out there. One of our friends lost his job. It took 2 years of looking but he got a good job at the age of 60.
    Another friend lost her job and got an identical job at the age of 58.

    by susan — January 30, 2014

  11. There has been a change in when they tell you to take ss. Think back 15 years. They were telling people to go down and sign up for ss as soon as they could. Remember that? Now they are telling people not to. Interesting.

    by susan — January 30, 2014

  12. My husband is 74 years old and still working a job that is physically and mentally active. He began taking his s.s. benefits at the full age, and we are taxed on most of them. The tax equals about 33% of what he pulls in each month in benefits. However, think about it; any of us would be happy to receive 67% of something over nothing. Additionally, the amount of his benefits go up every year; and he still medical and other benefits from working.

    I’d say, if you like your job – keep working, and pay the tax on your s.s. benefits!

    by ella — January 30, 2014

  13. Referring to the excellent question from Cyn Rogers about what income counts in calculating earnings limits:
    This is from a SSA document: http://www.socialsecurity.gov/pubs/EN-05-10069.pdf

    What income counts…
    and when do we count it?
    If you work for someone else, only
    your wages count toward Social
    Security’s earnings limits. If you are
    self-employed, we count only your net
    earnings from self-employment. For the
    earnings limits, we do not count income
    such as other government benefits, investment earnings, interest, pensions,
    annuities and capital gains. However,
    we do count an employee’s contribution (over)
    to a pension or retirement plan if the
    contribution amount is included in the
    employee’s gross wages

    by Admin — January 30, 2014

  14. You can use that earned income to put some into a Roth IRA. Wish that Roth had been avaiable earlier in my career.

    by Elaine — January 30, 2014

  15. Admin – thanks for shedding some light on a very confusing policy!

    by Cyn Rogers — January 31, 2014

  16. Good article I turned 66 and kept working files for SS beneifits and enjoy the “extra” cash is helping me get the house ready for retirement, allowing me to take a nicer vacation, put $$$ away for retirement, allows me to gamble in the market (so far way ahead) and to help my sons families with those pesky things that happen in the earlier parts of married life that the average person encounters (bills) unexpected repairs etc.

    by The Job Doc — January 31, 2014

  17. Is my pension considered “earned income”?

    by Trish — February 6, 2014

  18. And do they look at gross income or adjusted gross?

    by Trish — February 6, 2014

  19. Just saw the answer about pensions. What was the limit one was able to make in 2013 if under 66? I know it was 14,600 in 2012.

    by trish — February 6, 2014

  20. To Trish: Go to ssa.gov for social security matters and google “tax Friendly states for retirement to see what your state taxes in retirement.

    by Mark P — February 7, 2014

  21. This comment came in the general mail from Elaine C. We are posting it here because we believe the answers to her questions are contained in this article.

    Could you do an article on taking social security after reaching full retirement age and while still working full time? I am so curious about it. Thanks.

    by Admin — April 2, 2015

  22. Thanks for referring me to the article. I didn’t know that even if taking SS, my continuing to work and paying into the system will help to increase the amount I receive. That extra money will be a huge help for preparation into retirement. I’ll be sure to save enough to pay taxes. The Job Doc is doing some of what I plan to do with the money.

    by Elaine C. — April 2, 2015

  23. Elaine,
    Yes; my husband worked until almost 76 (this past Jan.) and his soc. sec. amount continued to increase (a blessing!) We did pay quite a few taxes on it, however. What i don’t know (as i’m not 66 yet) is whether my amount will be determined by his final payout or by what he first received when he applied ten years ago.

    by ella — April 3, 2015

  24. In regards to the earning limit – is that figured on a calendar year? So if my husband begins taking SS in June, are his earnings from Jan. to May counted against the 15,000 + limit? If so, is it best to retire on Dec. 31? His position of 32 years was just eliminated, renamed, and given to a much younger colleague at a greatly reduced salary…trying to determine if he should file for SS now, or at the end of 2015. He is 64. Waiting until 66 is probably not an option now.

    by SandyZ — May 19, 2015

  25. Regarding the question if SS looks at gross income if you continue to work and collect SS. When you initially sign up they will ask if your planning on working and what your estimated annual income will be. In my case I told them I would have a gross income of about 18K. They in turn held two SS checks that first year. When I filed my tax return my adjusted gross dropped to 12K because of the 6K for health insurance. The following year they paid out the two checks held the previous year. I can only assume they looked at adjusted gross?

    by Jim C — May 20, 2015

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