Social Security benefits have long formed a critical financial cornerstone for millions of Americans in retirement. This is particularly true for women, who make up 55% of Social Security beneficiaries according to the latest data from the Social Security Administration.

The retirement landscape, however, is shifting. An increasing number of individuals are choosing to work well into their golden years, blurring the line between career and retirement. As a result, one of the most common questions I field from clients is whether they should start collecting Social Security benefits while continuing to work, or if they should wait until they’ve fully retired.

This decision carries significant weight, potentially impacting both your financial security and your overall retirement experience. While continuing to work can provide additional income and a sense of purpose, it’s crucial to understand how employment may affect your Social Security benefits. In this blog article, we’ll explore the interplay between earned income and Social Security payments, so you can take steps to maximize your financial resources as you approach and transition into retirement.

Understanding Social Security Retirement Benefits

Before diving into the complexities of working while receiving Social Security, it’s important to understand the basics of retirement benefits.

First, to be eligible for Social Security retirement benefits, you generally need to have earned 40 credits, which typically equates to 10 years of work. The amount you receive is based on your lifetime earnings.

Your full retirement age (FRA)—the age at which you’re entitled to receive your full Social Security benefit amount—is a pivotal concept. For those born between 1943 and 1954, the FRA is 66. It gradually increases to 67 for those born in 1960 or later.

Beneficiaries have the option to start receiving benefits as early as age 62, but this can permanently reduce your monthly benefit amount by as much as 30%. On the flip side, delaying benefits past your FRA can increase your monthly payment. In fact, for each year you delay, up to age 70, your benefit grows by about 8%.

Understanding these nuances is crucial for planning your retirement strategy, especially if you’re considering working while collecting benefits. Your decision about when to start benefits can significantly impact your long-term financial security, so it’s worth carefully weighing the pros and cons based on your individual circumstances and retirement goals.

Rules for Working While Collecting Social Security

If you’re considering working while collecting Social Security, it’s essential to understand the rules that govern this situation. The Social Security Administration (SSA) imposes earnings limits that can affect your benefits, depending on your age and income.

Before reaching your full retirement age, there’s a strict earnings limit. In 2024, for example, you can earn up to $22,320 without any reduction in benefits. However, for every $2 you earn above this limit, your benefits are reduced by $1.

The year you reach full retirement age has a different rule. In 2024, you can earn up to $59,520 in the months before your birthday month without affecting your benefits. If you exceed this, the SSA withholds $1 in benefits for every $3 you earn above the limit.

Once you’ve reached full retirement age, these earnings limits no longer apply. You can work and earn as much as you want without any reduction in your Social Security benefits.

On the bright side, if your benefits are reduced due to excess earnings, they’re not lost forever. The SSA will recalculate your benefits at full retirement age to account for the months when they withheld your benefits.

Benefits of Working While Collecting Social Security

Working while collecting Social Security can offer several advantages that go beyond just financial benefits.

The most obvious benefit is increased income. By combining your Social Security benefits with earnings from work, you can potentially enjoy a higher standard of living in retirement. This extra income can help cover expenses, fund hobbies, or even allow for some luxury spending like travel, which you might not have considered otherwise.

Working into your retirement years can also lead to higher future Social Security benefits. Your benefits are calculated based on your 35 highest-earning years. If you continue to work and earn more than you did in previous years, you could replace lower-earning years in the calculation, potentially boosting your future benefit amount.

Beyond finances, working in retirement can provide significant mental and social benefits. Staying engaged in work can keep your mind sharp, provide a sense of purpose, and offer opportunities for social interaction. Many of my clients find that continuing to work, even part-time, helps them maintain a sense of structure and fulfillment in their lives during their retirement years.

Lastly, if you’re earning enough from work, you might be able to delay drawing from other retirement accounts like 401(k)s or IRAs. This gives these accounts more time to grow, potentially providing you with a larger nest egg for later in retirement when you might need it more.

Drawbacks of Working While Collecting Social Security

Although working while collecting Social Security can have its advantages, it’s important to be aware of the potential drawbacks as well.

The most significant disadvantage for many is the potential reduction in current benefits. As mentioned earlier, if you’re under full retirement age and earn above certain thresholds, your Social Security benefits may be reduced. This could mean receiving less money now, even though you may recoup it later.

Working also means an increase in your overall income, which can lead to a higher tax bill. Your combined income from work and Social Security benefits might push you into a higher tax bracket, resulting in a larger portion of your earnings going to taxes.

Furthermore, working could make your Social Security benefits themselves taxable. If your combined income (adjusted gross income + nontaxable interest + half of your Social Security benefits) exceeds certain levels, up to 85% of your benefits may become subject to federal income tax.

Lastly, your additional earnings from working could increase your Medicare premiums if you’re 65 or older. IRMAA, which stands for Income-Related Monthly Adjustment Amount, is a surcharge some Medicare Part B and Part D beneficiaries must pay in addition to their standard premium. The SSA determines who pays IRMAA based on their modified adjusted gross income (MAGI) from two years ago. In 2024, individuals earning more than $103,000 and married couples filing jointly earning more than $206,000 are subject to IRMAA.

While these drawbacks don’t necessarily mean you shouldn’t work while collecting Social Security, they’re important factors to consider. Each person’s situation is unique, so it’s wise to carefully evaluate how these potential drawbacks might affect your overall financial picture and lifestyle in retirement.

Financial Considerations

When deciding whether to work while collecting Social Security, it’s helpful to consider the broader financial implications.

First, a break-even analysis can be a helpful tool. This involves calculating the age at which the total benefits you’d receive by delaying Social Security would surpass the total benefits you’d receive by claiming earlier and working. This can help you decide whether it’s more financially advantageous to claim early and work, or delay benefits.

Tax implications are another important factor. Your combined income (adjusted gross income + nontaxable interest + half of your Social Security benefits) determines whether your benefits are taxable at the federal level. In essence, earning additional income while receiving Social Security can potentially push you into a higher tax bracket or increase the portion of your benefits subject to taxation. This means that working while collecting benefits might reduce your net income more than you initially anticipated due to these tax consequences.

Finally, working while receiving benefits can also impact your other retirement accounts and strategies. For instance, if you’re earning enough, you might be able to continue contributing to retirement accounts like 401(k)s or IRAs, potentially increasing your long-term savings. However, once you reach RMD age, you’ll need to start taking required minimum distributions from most retirement accounts, regardless of whether you’re still working.

Strategies for Maximizing Social Security Benefits

Several strategies can help you maximize your Social Security benefits while working. Here are a few approaches to consider:

• Delaying your benefit claim until full retirement age or even up to age 70 can significantly increase your monthly payments. If you’re able to continue working during this time, you can potentially boost your lifetime benefits while avoiding any reductions due to excess earnings.
• Consider a phased retirement approach. This might involve reducing your work hours gradually while starting to claim benefits. This strategy can provide a smoother transition into retirement while allowing you to test the waters of working less.
• Don’t overlook spousal benefits. If you’re married, divorced (after at least 10 years of marriage), or widowed, you might be eligible for benefits based on your spouse’s work record. In some cases, it might make sense for one spouse to claim early while the other delays, depending on your individual earnings histories.
• Evaluate your work options carefully. Part-time work might allow you to earn income without exceeding the earnings limit, while full-time work could lead to benefit reductions if you’re under full retirement age. However, full-time work could also lead to higher future benefits by increasing your overall earnings record.

The best strategy depends on your individual circumstances, including your health, financial needs, and personal preferences. It’s often beneficial to run different scenarios and consider consulting with an experienced professional who specializes in retirement planning.

Align Financial Is Here to Help.

Working while collecting Social Security benefits is a complex decision with a variety of implications. The right choice for you ultimately depends on your unique financial situation, health, and retirement goals.

Remember, you don’t have to make this decision alone. Align Financial can help you understand the intricacies of Social Security benefits, allowing you to make an informed decision for your future. Together, we’ll design a personalized plan that supports your financial goals and empowers you to navigate your retirement journey with confidence. Contact us today to schedule an introductory meeting.