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.
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.