Working while claiming Social Security? Don’t get caught off guard

Despite it being ever-present… somehow, someway, people who have been saving for retirement remain fascinated by virtually every aspect of Social Security.

Which is a big reason our Social Security workshops are by far our most well attended. (And on that note, we will be announcing new, late-March and early-April Social Security workshops in select cities soon.)

But why the obsession with the program?

Is it the complexity? Is it the importance of perfectly timing your application to maximize your benefit? Or is it the science behind the process of precisely blending your Social Security income with your other savings?

Edsger W. Dijkstra, a Dutch computer genius, said, “There should be no such thing as boring mathematics.”

To perfect your Social Security roadmap is indeed to tackle math. And I can attest to the fact that when it comes to money and retirement and meeting with clients, we can all agree that this type of math is anything but dull.

On a recent podcast episode, we received a question about how working when receiving a Social Security benefit can reduce that benefit. Time constraints kept us from answering the question as thoroughly as we would have liked, so I thought I’d cover the topic here.

How does working affect your Social Security?

To be clear, you can simultaneously work and receive Social Security retirement benefits (or also survivors’ benefits). What impacts your benefit amount the most are your age and your income. (This is called the Social Security Earnings Test.)

The key here is your full retirement age (FRA). If you were born on January 2^nd, 1960, or later, your full retirement age is 67. That means that if you just turned 62, and you work and earn more than a certain income, and you decide to apply for benefits, your benefit amount will be reduced.

But there’s good news. The money you lost out on by working and applying for Social Security before your FRA will be returned to you by way of an uptick in your benefit amount once you do finally reach your FRA.

How much money can you make and still qualify for benefits?

As I mentioned above, if you were born on the 2^nd day of 1960, or after, your FRA is 67. And that of course means that no matter how much you make - if you’ve reached your FRA - you will not receive a smaller benefit amount. (Just to be clear, this has nothing to do with taxation, which is a separate matter).

But if you have yet to reach your FRA, there is a limit to how much you can earn and still receive your full benefit.

Take 2024, for example. If you will not reach your full retirement age this year (2024), then you apply for benefits, the Social Security Administration (SSA) will deduct a dollar for every two dollars you earn over $22,320.

But if you will reach your FRA this year (2024), the SSA will subtract one dollar for every three dollars you earn above a $59,520 income threshold.

How do distinct types of income affect your Social Security benefit amount?

When it comes to the SSA, not all income is created equal. In fact, if you are employed by someone else, or some entity (and not self-employed), only your actual wages count toward your pre-FRA earning limit amounts.

While people who are self-employed “only” get hit for their “net earnings.”

Other types of income that do not count toward the earnings threshold include interest income, pensions, annuities, and government benefits, just to name a few.

If you’ve had benefits withheld, what will you get back when you reach your FRA?

If you claim Social Security before you hit your FRA, and you keep working, and you surpass the earnings limit threshold, as discussed above, you’ll have your benefit amount reduced.

So, how much will you recoup one you do hit your FRA?

Let’s say you apply for Social Security at age 62, you keep working, and over the next five years, until you reach your 67^th birthday (your FRA), you lose the equivalent of two months’ benefits per year due to having exceeded the earnings threshold.

If your FRA is 67, that’s 10 months of benefits you have lost. (That’s because you began taking Social Security 60 months (5 years X 12 months) before you hit your FRA.)

The SSA won’t give you back the difference all at once. Instead, they will slightly adjust your monthly payment (when you reach your FRA) as though you applied, for instance, 50 months early rather than 60.

And if you live long enough, you’ll actually benefit from the increase and make more than was withheld.

And what about the so-called “special rule?”

What happens if have yet to reach your FRA, you earn a good income, and you retire a few months into the year after having already surpassed the annual earnings limit?

Enter the “special rule.”

The special rule only applies to earnings achieved during your first year of retirement. While there are other considerations, in accordance with this rule, you’ll receive a full Social Security benefit amount for any full month you are retired during this first year (and providing any subsequent earnings (in 2024) are less than $1,860 per month).

Then, beginning the following year (in this instance, 2025), only the annual income limit (if reached) will apply.

Aside the complexity, the most frustrating aspect of Social Security is when mistakes are made. Most commonly, this can include leaving as much as $100,000 on the table by applying too early to too late for your specific financial situation.¹

Remember, via workshops, consultations with a fiduciary advisor, guides, and articles such as this one, that education is essential. Be like Edsger W. Dijkstra, and embrace the math, and learn everything you can about this sometimes-frustrating-but-always-fascinating program.

[1] https://www.cbsnews.com/news/study-says-retirees-lose-more-than-100k-by-claiming-social-security-at-the-wrong-time/