Taking Social Security while still working may sound like a good way to boost your income while you prepare for your impending retirement, but this strategy can have unexpected costs.
If you're under your full retirement age (FRA) -- 66 or 67, depending on when you were born -- the government may reduce your Social Security benefits if your income exceeds certain thresholds. This is called the Social Security Earnings Test, and it could leave you strapped for cash if you don't understand how it works. Here's what you need to know.
How does the Social Security Earnings Test work?
The Social Security Earnings Test calculates how much you will lose in Social Security benefits if you're under your FRA and earning over a certain amount each year from wages.
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In 2019, that limit is $17,640. This only applies to earned income -- that is, income you get from working. It doesn't apply to other government benefits, pensions, or investment earnings. For every $2 you earn over $17,040 in 2019, the Social Security Administration (SSA) deducts $1 from your scheduled monthly benefit. So if you are entitled to a $1,000 benefit check per month for a total of $12,000 per year and you earn $24,000 from your job, you'll forfeit $3,180 in benefits, leaving you with only $8,820 in Social Security benefits for the year.
The rules are slightly different if you're going to be reaching your full retirement age this year. In that case, the 2019 earnings limit is $46,920 instead of $17,640. For every $3 you earn over this limit before you reach your FRA, the SSA will reduce your benefits by $1. But as soon as you hit your FRA, these rules no longer apply. You can earn as much as you want without affecting your Social Security checks.
If you're unsure whether the Social Security Earnings Test applies to you, use the SSA's Retirement Earnings Test Calculator. Just enter your birth date, your estimated earnings, and your estimated Social Security benefit and it will tell you how much your benefits could be reduced.
The bright side
This may not sound like good news if you were counting on Social Security to cover a significant chunk of your expenses. You may have to make adjustments, like cutting back your spending or working more to make up for your smaller Social Security checks.
Alternatively, you may prefer to keep working full-time and delay your Social Security benefits so you can get more per check. For every month that you delay Social Security beyond your 62nd birthday, your benefit will increase by 2/3 of 1%. You'll reach 100% of your scheduled benefit at your FRA, then if you keep delaying you'll receive a bonus on top of your full amount, which maxes out at age 70. The maximum amount is 132% for those with an FRA of 66, or 124% for those with an FRA of 67.
If you do fall victim to the Earnings Test, that money isn't gone forever. When you reach your FRA, the SSA will recalculate your benefit to account for the withheld amount.
For example, if you started claiming Social Security at 62 and your full retirement age is 66, you would only receive 75% of your scheduled benefit amount per check because you started claiming early. But if you lost a year's worth of Social Security benefits between 62 and 66 due to the Earnings Test, when you turn 66, the SSA would recalculate your benefits and start giving you the amount you would have received if you'd started claiming benefits at 63, rather than 62, to account for the lost year of benefits.
Ultimately, it's up to you to decide when to begin taking Social Security. But if you decide to claim your benefits while you're still earning money from working, you need to understand how your income will affect your Social Security checks. In the short term, claiming early may reduce your benefits, but it could certainly help you over the long term.
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