Continuing to work after age 62 can affect your level of Social Security retirement benefits, whether you are receiving benefits or not. The effects are important, but few people understand them. Knowing how continuing to work affects benefits, and might not affect them, leads to better decisions about when to claim benefits and whether to continue working.
You can begin claiming Social Security retirement benefits as early as age 62, whether you are working or not. The level of benefits increases for each year you wait to claim benefits through age 70. In addition, the level of benefits can increase if you continue working, whether you claim benefits at 62 or later.
Most people know delaying claiming increases benefits. But many don’t know how continuing to work can increase benefits. Social Security retirement benefits are calculated using your 35 highest-earning years. I won’t go into the details of how benefits are calculated.
You can read them in my book, “Where’s My Money: Secrets to Getting the Most out of Your Social Security.” If you don’t have 35 years of earnings, you’ll be assigned an income of $0 for each of the missing years.
Most of us had lower-earning years early in our careers, even after they are indexed for wage inflation. A number of people also had years with little or no earnings because they weren’t in the workforce full time, either voluntarily or involuntarily.
That means if you work another year and earn more than you did in an earlier year, the earnings in the latest year will replace earnings from an earlier year among your highest 35 years. Knowing this, some people realize that working another year or few years will replace very low-earning years with higher-earning years and meaningfully increase their Social Security benefits.
Others will realize they already have 35 high-earning years; working more years would have little or no effect on their retirement benefits. The amount of the monthly increase in benefits will depend on the number of low-earnings years that are replaced and the dollar differences between the new higher-earnings year and the lower-earnings years, after adjusting the lower-earning years for wage inflation.
Another factor is your income level. Middle- and lower-income workers receive benefits that replace a higher percentage of their working years’ income than upper-income earners. For middle- and lower-income workers, replacing a few low-earning years with higher-earning years can generate a meaningful increase in lifetime benefits. But for someone with relatively high earnings most years, working a few more years might increase his or her monthly benefit by only a few dollars at most.
After you turn 62, Social Security recalculates your benefits every year that you don’t claim benefits. It will take your earnings for the latest year, add that to your record of lifetime earnings and select the 35 years with the highest inflation-adjusted earnings. In some situations, the effects of working longer are so powerful that delaying retirement by only three to six months has the same impact on a retirement standard of living as saving an additional percentage point of earnings each year for 30 years, according to the study “The Power of Working Longer” published by the National Bureau of Economic Research and written by Gila Bronshtein, Jason Scott, John B. Shoven and Sita N. Slavov.
After the increase in monthly benefits from working longer is calculated, that’s not the end of the story. You’ll receive those higher benefits every month for the rest of your life no matter how long you live. In addition, Social Security retirement benefits are indexed for inflation.
A small increase in benefits can compound to a meaningful lifetime sum when you’re retired for a couple of decades or longer and the benefits increase with inflation. When you continue to work while receiving Social Security retirement benefits, the effects are more complicated. The calculation of your Social Security retirement benefits is a rolling, annual process when you keep working. Each year Social Security reviews the records for all Social Security recipients who work.
If your latest year of earnings turns out to be one of your 35 highest years, replacing an earlier lower-earning year, Social Security will refigure your benefit and pay you any increase due. This is an automatic process. The additional benefits will be paid in December of the following year.
For example, if you work and also receive Social Security retirement benefits in 2022, in December 2023, you should receive an additional payment reflecting an increase in your 2022 benefits, if the earnings in 2022 raised your benefit. Your monthly benefits going forward also will be adjusted for the increase.
You also need to consider the earnings limit that’s imposed when you continue to work while receiving Social Security benefits after age 62 and before full retirement age, or FRA. At certain ages, if you earn “too much” money while claiming retirement benefits, your retirement benefits will be reduced. But this decrease is only temporary. You’ll get it back later.
There’s no longer an earnings limit after you reach full retirement age. After that age, you’ll receive full benefits no matter how much money you continue to earn while working. When you’re younger than FRA during the entire calendar year, Social Security will deduct $1 from your benefits for each $2 you earn above the earnings limit. The limit is indexed for inflation each year and is $19,560 in 2022. The limit is different for the year you reach FRA.
In the year you reach FRA, you lose $1 of benefits for each $3 you earn above the limit until the month you reach FRA. In addition, the earnings limit is much higher in the year you reach FRA. For 2022, the earnings limit for the year of FRA is $51,860. But losing some or all of your benefits because of the earnings limit isn’t a disas- ter. The loss of benefits is only temporary.
The additional earnings are added to your lifetime earnings record and could replace lower earnings from earlier years. Also, after you reach FRA, the benefits forfeited in earlier years will be used to increase future benefits. Ex- ceeding the earnings limit is more like a deferral or withholding of benefits than a loss of benefits. You don’t have to guess how additional earnings might affect retirement benefits. The Social Security website has a Retirement Earnings Test Calculator.
Enter your birth date and a few other details in the calculator, and it will tell the amount, if any, by which your benefits would be reduced based on the amount of earnings you expect. You don’t have to open a “my Social Security” account to use this calculator, but you can use a more robust calculator and save the results by opening an account.