7 Things to Know About Working and Collecting Social Security Benefits
Working while collecting Social Security has become a popular choice for those approaching retirement, but is it the right choice? If you’ve been thinking about receiving Social Security benefits early, then this is the blog to read. There are seven things about working and collecting Social Security that I believe are important to know. Therefore, my goal in this blog is to educate you on each of them so that you can make an educated decision when the time comes!
Key Takeaways:
· Social Security Recap
· Is There a Limit to How Much Social Security You Can Receive While Working and Collecting Early?
· Practical Examples of Social Security Withholding and How Does All This Work?
· What Income Counts Towards Social Security Withholding?
· The Special Rule You HAVE to Know
· Should You Report Income Changes to Social Security?
· Are Withheld Benefits Gone Forever?
Social Security Recap
To start, let’s cover how Social Security works. Social Security can be collected between the ages of 62 and 70. An individual is entitled to their full benefit at full retirement age, which is between the ages of 66 and 67 depending on the year they were born. I will include a chart below that illustrates at which age you will reach full retirement based on your birth year. The other thing to know is that each year an individual delays their benefit, the larger it grows. Once full retirement age is passed, the individual will receive an 8% increase per year they delay up to age 70.
I would suggest you apply for your Social Security benefit three months before you would like it to start. If you want to start receiving your benefit at age 62, then you would want to apply when you were 61 and 9 months old. The most convenient way to apply is through the online application found on The United States Social Security Administration (SSA) found here.
In general, I believe that most people should wait at least until full retirement age to collect their Social Security benefit. This is especially true for individuals that are the higher earning spouse in their marriage. That said, there are situations where it could make sense to collect their benefit early. A few examples would include poor health/family history or an urgent need for cash. If you are interested in learning more about when to collect Social Security then I would suggest listening to my podcast, “Collect Social Security Now or Wait?”
Is There a Limit to How Much Social Security You Can Receive While Working and Collecting Early?
There is a limit to how much you can earn if you collect your Social Security benefit early. If you collect your benefit before full retirement age (early), then there are two limitations that apply. The first limitation exists between age 62 and the year that you reach your full retirement age with a 2023 earnings limit of $21,240. Which means that for every $2.00 you earn over that earnings limit, your benefit is withheld by $1.00, a 50% reduction. The second limitation applies to the year you reach full retirement age with an earnings limit of $56,520 in 2023. If your earnings exceed the limit, then your benefit will be reduced $1.00 for every $3.00 you earn over the limit which is a 33% reduction of your benefit.
Although, there is no earnings limit once you reach your full retirement age. Once reached, you can earn your full salary and collect your Social Security benefit without any limits or restrictions. This could be a great option for any individual that fears they will run out of money in retirement. Not only would you have two income sources to help grow your savings, but you would also spend less time in retirement which would reduce your total retirement expenses amount.
Practical Examples of Social Security Withholding and How Does This All Work?
Let’s look at a case using Bob, a 62 year old who wants to collect his Social Security benefit. Imagine that he could receive his Social Security benefit of $1,200 starting in January. If Bob continues to work and earns $30,000 in 2023 then that would put him $8,760 over the earnings limit of $21,240. As mentioned above, there is a two to one reduction, so the amount withheld would be half of the amount over the limit, which is $4,380.
If Bob earned $40,000 then he would be $21,240 over the earnings limit which would result in $9,380 worth of his benefit being withheld. To determine the number of months that would be withheld, you would divide the earnings amount over the limit by his Social Security benefit ($1,200 in the example). The calculation in this example tells us that 7.8 months of Bob’s benefit would be withheld. Although, Social Security will not withhold half payments or partial payments, so they would round up and withhold eight months of his benefit. Which means that Bob would only receive his benefit for the final four months of the year, while the preceding eight were withheld. Bob would then receive the fifth of his monthly benefit payment that was lost due to rounding in January the next year.
For our last example, let’s analyze a situation where the individual reaches their full retirement age in that year. We will use Karen, a 65 year old woman with a full retirement benefit of $1,800 and a salary of $75,000. Her birthday is on February 5th with a full retirement age of 66 and 4 months, which means she’ll reach her full retirement age in June. She is considering collecting her benefit beginning in January next year when she will reach her full retirement.
Karen’s earnings would be limited to $56,520 in 2023. This means that for any of her benefit to be withheld, she would have to earn more than $56,520 in the five months prior to reaching her full retirement. This would be unlikely as her monthly salary would be ($75,000/12) $6,250 which would be about $31,250 in the five months. Which is not even close to the earnings limit so she will not be subject to any withholdings.
If Karen’s birthday was instead in July, then she would not reach her full retirement until November. She would earn through the month before she turned 66 and four months which would be October. In this case, her earnings would be about $62,500 through October which is above the earnings limit. There would be an overage of $5,980 so you would take 1/3 of that to determine the withholding which would be $1,993.33. That is the amount she would have to withhold for next year and would get back the following January. There is a useful calculator provided by the SSA that calculates your withholding based on your date of birth, expected earnings, and expected Social Security benefit.
What Income Counts Towards Social Security Withholding?
There are many types of income that individuals receive, so which ones count towards Social Security? Only earned income is counted which means that investment, pension, and other forms of passive income you may receive in retirement will not count. Earned income includes all taxable income and wages you get from working for someone else, yourself, or from a business. That said, there are scenarios where the calculation is not as simple, and I will cover a few below.
One complexity arises when calculating the earned income for a self-employed individual. Any income earned working for one person or a corporation will count towards Social Security. However, if you are self-employed then only your net earnings and any contributions to a pension or retirement plan (if included in your gross wages) are counted. If you put money into a 401(k) and it reduces your net pay, then you won’t have to pay tax on the money, and it will count towards your Social Security withholding.
The next complexity occurs when a spouse or child collects off your Social Security benefit while you earn above the earnings limit. In this case, any benefits that are withheld for you will also be withheld for them. The other complexity that I want to cover exists for those who work outside the US. Any work outside of the US must be reported to determine whether it should count as a reduction in your benefit. This would be done by sending notification to the US Embassy, Consulate, or Social Security office.
The Special Rule You HAVE to Know
There is a special earnings rule that you should take advantage of in the first year you retire. The earnings rule applies to individuals who retire mid-year after already earning more than the annual earnings limit. Under this special rule, the individual could get a full Social Security check for any whole month after he/she retired regardless of their earnings. Then for anything after that, the usual earnings limit would apply. To better explain the rule, I will cover an example below.
For example, Jim plans to retire in July of next year when he turns 64 years old. He will have earned $80,000 through July and will be eligible for a monthly Social Security benefit of $1,600. Under the special earnings rule, Jim would be able to collect his full $1,600 per month from July until December. The earnings limits would typically apply here since Jim is retiring early (before full retirement) and earning more than the limit. However, since it’s his first year of retirement, the earnings limit would not apply, and he would not be subject to any withholdings.
Should You Report Income Changes to Social Security?
The short answer is yes. Social Security bases any withholding (if you’re collecting your benefits early) on what you tell them you’re going to earn. If you told them you aren’t going to earn any money this year and then proceed to earn some, then you may put yourself in a tough situation. To avoid that, you should let them know so that they can adjust the amount.
If the SSA discovers that you earned more than you claimed, then they will stop your payments and continue to hold them until the correct amount is determined. This could result in you owing them money back, which could create a bad situation. Therefore, the best thing to do is always update Social Security on income changes to avoid these potential headaches.
Are Withheld Benefits Gone Forever?
Imagine you collect your Social Security benefits early, are still working, and continue to have money withheld from your benefit. It may cause you to wonder if you will ever get that money. To which the answer is yes, you will get that money back once you reach your full retirement age. However, it’s likely not going to be as much had you just waited until full retirement age to collect your benefit.
For this reason, it makes more sense to wait at least until full retirement to collect your benefit. If you do have to work and collect your benefit, then you should be aware of how working will affect it. Knowing how much money will be withheld, or when you will receive those funds are both key pieces of information that can be used to improve your financial planning. If you want to learn more about Social Security then I suggest you follow the link here to check out my podcast as Social Security is one of the main topics that I cover.
