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Do I Have to Stop Working to Collect Social Security?

Christy Bieber, The Motley Fool

In 2018, close to half of all workers indicated they expect to work past the age of 65 . While not all seniors can work into their late 60s, many people want or need to work, either because of savings shortfalls or because they enjoy their careers.

For those who wish to work late in life, there's one key question many want answered: Do I have to stop working to collect Social Security? Benefits from this retirement program become available as early as 62, and you do not have to stop working to collect them. But the amount you earn could potentially cause some or all of your Social Security benefits to be withheld, depending on your age.

This guide will explain how working while collecting Social Security could affect your benefits, so you can plan for what your income will be in retirement. 

Older woman at work in office.

Image source: Getty Images.

How much can I work and still collect Social Security benefits?

If you have claimed Social Security benefits after the age designated as your full retirement age, you can work as much as you want, earn an unlimited amount, and still receive your full Social Security benefits. 

If you have not yet reached full retirement age, you may have your Social Security benefits checks reduced if you work while you are collecting benefits. You do not lose this money, though. You'll receive credit for the portion of benefits you don't receive, and will get larger checks later because of the reduction. 

What is full retirement age?

Full retirement age (FRA) is the age at which you can retire, receive your standard Social Security benefit, and work as much as you want without your benefits being impacted.

If you retire prior to FRA, you will see a benefits reduction for claiming early, and working will affect your monthly Social Security checks. If you retire after FRA, you will earn delayed retirement credits that increase your benefit, and working will not affect the size of your monthly check. 

As the table below shows, the age designated as your FRA depends on when you were born. If you were born on Jan. 1, the prior year is the year used to determine your FRA. 

If You Were Born in FRA Is
1937 or earlier 65
1938 65 and 2 months
1939 65 and 4 months
1940 65 and 6 months
1941 65 and 8 months
1942 65 and 10 months
1943-1954 66
1955 66 and 2 months
1956 66 and 4 months
1957 66 and 6 months
1958 66 and 8 months
1959 66 and 10 months
1960 or later 67

Table source: Social Security Administration .

How much are benefits reduced if you work before FRA?

The specific reduction in your benefits if you work after claiming them depends on whether you are going to hit your FRA during the course of the year or not.

Working in years before you'll hit FRA

If you work and claim benefits in any year when you won't reach FRA, benefits are reduced by $1 for every $2 earned above a specific income threshold. This threshold changes annually. For 2019, it's $1,470 per month or $17,640 per year. This rule would apply to you if you claim benefits at 62, 63, 64, or 65 when your FRA is 66, and it would apply to you if you claim benefits at 62, 63, 64, 65, or 66 when your FRA is 67. 

Say you would be scheduled to receive $16,800 in annual Social Security income in 2019. Here's how earning may affect your benefits:

  • If you earn $60,000, you have earned $42,360 above the $17,640 annual earnings limit ($60,000 minus $17,640). Benefits are reduced for $1 for every $2 earned, so divide the $42,360 in excess earnings by 2 to see that $21,180 in benefits are withheld. This is more than the benefits you received, so your entire annual Social Security benefit would be withheld. 
  • If you earn $40,000, you have earned $22,360 above the annual earnings limit, so $11,180 in benefits would be withheld. You'd receive $5,620 in Social Security benefits.
  • If you earn $10,000, you haven't hit the $17,640 limit, so none of your benefits are withheld. You will receive the full $16,800 in benefits for 2019. 

Working in the year when you'll hit FRA

If you are going to hit FRA during the year you are working, the rules differ -- but benefits could still be reduced. You'll see a reduction in Social Security benefits equal to $1 for every $3 earned above a certain income threshold. This income threshold is much higher for those who are hitting FRA during the year they're working than for anyone who won't reach this milestone age during the year. 

The threshold above which your Social Security benefit is reduced for working during the year you hit FRA is $3,910 monthly or $46,920. So, if you would get a $16,800 benefit, here's how your earnings may affect your benefits:

  • If you earn $60,000, you'll have earned $13,080 above the annual earnings limit ($60,000 minus $46,920). Benefits are reduced by $1 for every $3 you earned, so divide $13,080 in excess earnings by 3 to see that $4,360 in benefits are withheld. 
  • If you earn $40,000, you are below the $46,920 annual limit, so your benefit won't be affected.

What income counts when determining if working lowers Social Security benefits?

Since any reduction to benefits resulting from working is determined based on income, it's important to understand what the Social Security Administration (SSA) actually considers income. 

If you are working for an outside employer, only your annual wages count in determining if you've hit the income limits. Employee contributions to pension plans also count as income if your contribution amount is included in gross wages. If you are self-employed, only net earnings from self-employment count.

Income that does not count includes:

  • Money from government benefits programs
  • Income from investments
  • Interest income
  • Pension income
  • Capital gains income
  • Money paid by annuities

When you work for an employer and receive wages, income counts when you earn it -- not when it is paid to you. If you accumulate sick pay or vacation pay in one year or earned a bonus in one year, but didn't receive money until the next year, the income will not count in the year it was paid out to you. It will count for the year you earned the bonus or paid leave. 

If you are self-employed, however, income counts when you receive the money rather than when you earn it. The only exception is when you earned it before becoming entitled to Social Security benefits and were paid after becoming eligible. 

How the reduction in benefits works if you earn too much income

If you work before FRA and earn so much money that your Social Security benefits are reduced, this reduction doesn't make each individual monthly check smaller. Instead, your entire benefit check is withheld to account for the reduction in benefits.

Once enough money has been withheld, then you'll begin receiving your full benefits check. And if the SSA withheld too much money, you'd get the funds back the following year. 

For example, let's say you are 64 years old, your benefit would be $1,200 monthly in 2019 for a total of $14,400 in annual benefits, and you decide you want to work while receiving it. Here's what would happen:

  • You're working during a year when you won't hit FRA, and you earn $30,000, which is $12,360 above the $17,640 annual limit.
  • Your benefit is reduced by $6,180 ($1 for every $2 earned above the limit).
  • The SSA will withhold your entire monthly check until $6,180 has been withheld. So, you would receive no benefit checks for the first six months of the year ($6,180 withheld divided by a $1,200 monthly benefit = 5.15 months, so they'd need to withhold six months of benefits).
  • In July, you'd begin receiving your $1,200 monthly benefit. 
  • The SSA withheld $7,200, which is $1,020 extra. In 2020, you'll receive the extra $1,020 withheld from your June check. 

How does the Social Security Administration know how much you'll earn?

If you plan to work while receiving benefits, and you think you'll earn enough that your Social Security checks will be affected, you must let the SSA know. You should call (800) 772-1213 or visit your local SSA office to report your earnings. 

The SSA can also find out about earnings from W-2s and tax returns you submit to the IRS. However, the SSA won't get this data in a timely manner to be able to appropriately withhold benefits, so your income from Social Security may not be withheld until months after it should be. 

You should communicate with the SSA both at the start of the year when you expect to earn enough to impact your benefits, and if any changes occur during the year that could affect your income. The SSA indicates that benefit recipients are required to immediately report changes in circumstances that can affect their benefits. And recipients must alert the SSA no later than 10 days after the end of the month when the change occurred. 

The SSA also warns that if you don't report changes in a timely manner, or if you make false statements, the Administration can stop your benefits and may even impose sanctions against payments. Sanctions become progressively more serious -- the first is a loss of payment for six months, and subsequent sanctions include the loss of payments for 12 or 24 months. 

Do you lose your benefits forever if they are withheld due to working?

If you have some of your Social Security benefits withheld because you work while receiving them, you don't lose those benefits forever.

When you reach FRA, the SSA will recalculate your monthly benefit so you get credit for any months where you didn't receive a check because you worked so much. You'll receive a letter from the SSA letting you know whether your monthly income will change after this recalculation is completed. 

Working while receiving your benefits could potentially increase them later

If you work while getting Social Security benefits, they could be increased later. There are two possible reasons that could happen:

  • As mentioned above, your benefits will be recalculated to account for money withheld from you while working -- which can boost your monthly Social Security income. 
  • The wages you earn while working could raise your benefit by raising your average indexed monthly earnings (AIME)

AIME is crucial to determining your monthly benefit. When the SSA determines how much you receive per month, it:

  • Looks at your earnings during your career and adjusts them for inflation.
  • Adds up your annual inflation-adjusted earnings during your highest-earning 35 years of work.
  • Divides by 420 months (35 years x 12 months per year) to determine your average monthly earnings, or AIME. 
  • Provides benefits equal to 90% of AIME up to a first income threshold; 32% of AIME between a first and second income threshold; and 15% of AIME above the second threshold. 

You can learn more about how AIME works in our guide to the Social Security benefits formula. In short, benefits are based on an average of what you earned in the 35 years when your salary is the highest. If you didn't work for 35 years, the average is still based on 35 years, but some years of $0 are factored in.

If you keep working after you've retired, the SSA still considers the wages you earn in determining AIME. So, if you're able to replace a year of $0 earnings with a year when you had some wages, you'll raise AIME and thus increase your monthly benefit. Likewise, if you're earning more now at the start of your career than at the end, you can raise AIME by having a year of low salary replaced by a year of high salary. 

Should you work while receiving Social Security benefits?

Many people want to work while receiving income from the SSA. You may want to do this because you need to supplement the income you get from Social Security, or because you are bored during retirement and enjoy having a job. 

You do need to understand the impact this will have on your benefits, though. If you're counting on getting income from your job and SSA, and you end up losing most or all of your Social Security benefit because your earnings are too high, you are going to have a budget shortfall. 

You also need to consider whether you actually want to claim retirement benefits if you're able to continue working or whether waiting would be better. There are a few key things you need to know to make this determination:

Because you could boost your monthly benefit by delaying, and reduce it by claiming early, you may decide it makes more sense to just work and not claim benefits until at least FRA or perhaps even later.

Waiting would let you maximize the size of your Social Security checks, although you may not receive more total benefits. That's because the system is designed so beneficiaries who live to their expected life span receive the same total amount of money regardless of when benefits are claimed. Claiming earlier means more checks but smaller checks, while claiming later means fewer checks but larger ones. 

Your income from work could also affect whether benefits are taxed

There's one final thing to consider when deciding if you want to work while getting benefits: the tax implications. This is an important consideration regardless of whether you're working before or after FRA. 

Social Security benefits aren't taxed on the federal level if your income is below a certain threshold. But if your income is too high, a portion of your benefits could become subject to tax. 

"Income" means something specific when determining if benefits are taxable. Income includes half of your Social Security benefit amount plus the full amount of other taxable income and some nontaxable income. So, if your Social Security benefit is $12,000 and income from other countable sources is $30,000, you'd have $36,000 that counts ($30,000 + half of your $12,000 Social Security benefit). 

If your countable income is above $32,000 when married filing jointly or $25,000 for other filers, up to 50% of benefits become taxable. If income is above $44,000 for married filing jointly or $34,000 for other tax statuses, you could be taxed on up to 85% of your benefits

Now you know the rules for working while receiving Social Security 

As you can see, you don't have to stop working to receive Social Security benefits. But if you have not yet hit your full retirement age, you could see some of your benefits withheld if you earn too much at your job. You'll get credit for the withheld benefits later, though, as your monthly Social Security benefit amount will be recalculated once you hit full retirement age to account for the income you didn't receive.

Just because you can work and get benefits at the same time, though, doesn't mean you should. You may be better off simply working and putting off claiming benefits to raise your monthly checks by waiting to file. You also need to know the tax implications of having a job while getting benefits so you can fully understand the ways working can affect your total income. 

With this information in mind, you can determine what's best for you when it comes to both your job and your retirement benefits. Since Social Security is an important source of income for retirees, it's worth doing the research into how the program works before you claim benefits. Our complete guides to Social Security are a good place to start to give you the details you need to make informed choices. 

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