Working and Social Security – What Are the Rules?

By Mitchell J. Smilowitz, CPA

Many people continue to work in retirement. Their reasons vary. Some may need to earn additional income to support their retirement lifestyle. Some enjoy the social aspect of working and the work they do. Others are asked to take positions on a temporary basis to fill vacancies.

If you plan to collect Social Security, what impact does working have on your monthly benefits?

Working and Collecting Social Security Before Full Retirement Age

If you begin collecting Social Security benefits before reaching Full Retirement Age (FRA), the Social Security Administration will deduct $1 of your benefits for every $2 of your wages that exceed the “earnings limit,” $18,240 in 2020.

Consider an example where you receive a Social Security benefit of $9,600/year ($800/month) in 2020. You work during the year and earn $28,240 ($10,000 over the $18,240 limit). Social Security will reduce your benefit by $5,000 ($1 for every $2 you earn over the limit). You would receive $4,600 of your $9,600 in benefits for the year ($9,600 - $5,000 = $4,600).

The earnings limit only applies to wages from work. It does not include income from investments, pensions, annuities or interest. Your Social Security benefit is not reduced regardless of how much income you receive from these non-employment sources.

If your spouse, children or other dependents receive benefits based on your Social Security account, the earnings limit affects their benefits, too. In this situation, if your earnings exceed the limit, their benefits would be reduced.

The Social Security Administration’s Retirement Benefits web page and Retirement Earnings Test Calculator  provide more details and allow you to estimate the impact of work on your benefits.

What Happens When You Reach Full Retirement Age

While there is an earnings limit in the calendar year you reach Full Retirement Age ($48,600 in 2020), it is less stringent. The benefit reduction is $1 for every $3 earned over the limit up until the month you reach FRA.

Here’s how it works. In 2020, you receive a benefit of $800/month ($9,600/year). You reach FRA in August. In the 7 months from January through July 2020, you earn $50,700 ($2,100 over the $48,600 limit). Your Social Security benefit would be reduced by $700 ($1 for every $3 you earned over the limit). Once you reach FRA, August in this example, you would receive your full monthly benefit regardless of how much you earn during the rest of the year or in future years.

How Social Security Deducts Earnings from Benefits

Social Security determines the size of the earnings limit adjustment based on the earnings data it gets from your tax returns. Alternatively, you can report estimated wages to Social Security by calling 800-772-1213, or by visiting your local Social Security office.

The early retirement benefits you lose as a result of the earnings limit are not gone forever. When you reach full retirement age, Social Security will recalculate your benefit to include the amount you lost because of the earned income rule. The lost amount will be made up gradually over the course of up to 15 years.

Three Points to Keep in Mind

  • Starting Social Security before Full Retirement Age (FRA) permanently reduces your benefit.
  • There’s no penalty — no matter how much you earn — for working while taking benefits after you reach your FRA. Once you hit FRA, you can keep 100% of what you earn plus all your Social Security benefits. Find your Full Retirement Age.
  • Social Security recalculates your benefit amount to give you credit for the months they reduced or withheld benefits due to exceeding the earnings limit.

Deciding when to begin your Social Security benefits is one of the most important decisions you’ll make when you enter retirement. One of the factors influencing this decision is whether you expect to continue working. If you’ve reached full retirement age, you’ll receive your full Social Security benefits regardless of how much you earn.  Those retiring before reaching FRA are subject to the earned income rules. Please contact us at 888-JRB-FREE (572-3733) or send an email to set up a consultation.