Though the vast majority of people begin collecting Social Security benefits at age 62, most continue to work at a traditional job, at least on a part-time basis. Others will delay collecting Social Security benefits until they reach their full retirement age or even until age 70. However you handle it, being employed during retirement does have an effect on Social Security. And sometimes that effect can be substantial.
There are different scenarios in which continuing to work in retirement will impact the amount of your Social Security benefits.
Collecting Benefits While Working
The most obvious consideration is what working will do to your benefits if you retire between the ages of 62 and your full retirement age.
Loosely speaking, full retirement age is 66 if you were born between January 2, 1943 and January 1, 1955. If you were born after 1959, your full retirement age will be 67. Check out your full retirement age if you were born between January 1, 1955 and December 31, 1959. It will be 66 plus X months, depending upon your birth date.
If you collect your Social Security benefits but continue to earn income, your benefits will be reduced until you reach your full retirement age.
According to the Social Security Administration, here are the benefit reductions you can expect as a result of having earned income:
- If you are under full retirement age for the entire year $1 will be deducted from your benefit payments for every $2 you earn above the annual limit. For 2016, that limit is $15,720.
- In the year you reach full retirement age $1 will be deducted from your benefits for every $3 you earn above a different limit. In 2016, the limit on your earnings is $41,880. But that only affects earnings before the month you reach your full retirement age.
Once you reach full retirement age, whether that is 66, 67 or some number in between, your Social Security benefits will no longer be reduced as a result of your earned income.
Based on the above numbers, your strategy could be to earn no more than $15,720 per year if you’re collecting Social Security benefits and have not reached your full retirement age. You can increase that to $41,880 in the year you reach full retirement age. And beginning the month in which you reach full retirement age, you’re free to earn as much as you want.
Working and Delaying Benefits
The general rule with Social Security benefits is the longer you delay taking them, the higher the monthly benefit will be. This is a strategy being advocated by retirement experts and financial planners alike. It’s one of the best ways to increase your retirement income, particularly if you don’t have adequate retirement assets saved.
Loosely, here is what delaying Social Security benefits will look like (assuming your full retirement age is 67):
- If you start receiving retirement benefits at age 62, you will get 70 percent of the monthly benefit. The reduction reflects the fact that you will be receiving benefits for an extra 60 months.
- If you start receiving retirement benefits at age 65, you will get 86.7 percent of the monthly benefit because you will be getting benefits for an additional 24 months.
What this means is if you plan to begin collecting benefits prior to reaching your full retirement age, those benefits will be reduced.
But the reverse will work to your advantage. You can increase your monthly benefit by delaying collecting benefits past your full retirement age.
If your full retirement age is 67, you can increase your monthly benefit by 8 percent each year — technically, by 2/3 of 1 percent for each month you delay. If you delay collecting benefits until age 70, that will represent a delay of three years, which will increase your benefit by 24 percent (3 years X 8 percent). So if you could expect a benefit of $2,000 per month at age 67, you will get $2,480 per month by delaying receiving benefits until age 70.
It’s also important to understand there’s no additional benefit for delaying retirement past the age of 70. Since your monthly benefit will not be increased by such a delay, you should begin collecting benefits as soon as you reach that age, and no later.
The Effects of Earned Income on Future Benefits
Some people delay retirement because they’re making more money in their 60s than they have at any other time in their lives. And this strategy can have a positive impact on future Social Security benefits.
The Social Security Administration calculates your monthly benefit based on your earnings for the 35 years in which you had the highest earnings. These numbers are adjusted for inflation, so many of your earlier years will be better than they seem based on the numbers you remember. If you have worked for 50 years, the 15 years in which you had the lowest earnings will be disregarded in calculating your benefit.
So let’s say you continue to work between the ages of 62 and 70, and you earned more money in those years than you ever have in your life. The Social Security Administration will remove the lowest earning eight years from the 35 years they were using to calculate your benefit. Those years will be replaced by the current years in which you are earning higher amounts.
This will ultimately result in a higher monthly benefit. It certainly makes sense if you’re earning more money now than you ever have before. However, if you have always earned in excess of the maximum income for FICA purposes, the additional earnings may not affect your benefit in a positive way.
As you can see, there is an entire set of strategies built around your Social Security benefits. If you are at or near retirement age, carefully consider the strategies before you begin collecting benefits.