Confusion and misunderstandings abound in discussions about Social Security. A result is people leave tens of thousands of dollars of guaranteed lifetime income on the table.
Perhaps the most misunderstood issue, based on emails I receive, is how working past age 62 affects benefit levels, especially working while receiving retirement benefits.
There are several different factors at work, so you have to understand their interaction to estimate how your benefits will be affected over time.
You are eligible to collect retirement benefits beginning at age 62, but you’ll receive a reduced benefit. You receive your “normal” or full benefit if you retire at your full retirement age. This age depends on your year of birth. It’s being gradually increased to 67 for people born after 1959. If you were born January 2, 1957, through January 1, 1958, then your full retirement age for retirement benefits is 66 years and 6 months.
When you delay receiving benefits, the benefits are increased 8% for each year of delay through age 70. The increase is known as delayed retirement credits. There’s no increase in benefits due to delayed retirement credits after age 70. You receive the maximum amount of benefits by beginning them at 70, and you’ll receive the same amount if you delay their beginning past 70. But there might be another good benefit to delaying benefits if you continue working and earning income.
Your Social Security benefits are calculated using only your 35 highest-earning years. If you keep working, the additional years of income could increase the income in the 35 top years. You might knock off some low-income years when you were young and starting your career or years when you were laid off or earned a lower income for other reasons.
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, Social Security will refigure your benefit and pay you any increase due.
This is an automatic process, and benefits are paid in December of the following year. For example, if you worked and received Social Security retirement benefits in 2018, in December 2019, you should get an increase for your 2018 earnings if those earnings raised your benefit. The increase would be retroactive to January 2019.You don’t have to stop working to begin taking Social Security retirement benefits. You can begin the benefits anytime at age 62 or later. But if you aren’t yet full retirement age and continue to work for income, your benefits might be reduced.
If you’re younger than full retirement age, there is a limit to how much you can earn and still receive the full Social Security benefit due for your age. If you’re younger than full retirement age during all of 2019, Social Security will deduct $1 from your benefits for each $2 you earn above $17,640. If you reach full retirement age during 2019, $1 will be deducted from your benefits for each $3 you earn above $46,920 until the month you reach full retirement age. That’s not necessarily a bad thing, because the amount that your benefits are reduced isn’t truly lost. Your benefit will increase at your full retirement age to account for benefits withheld due to earlier earnings.
Here’s an example provided by Social Security. Let’s say you claim retirement benefits upon turning 62 in 2019, and your payment is $942 per month. But you continue to work and because of your income level, 12 months of benefits are withheld.
Social Security would recalculate your benefit at your full retirement age of 66 and 6 months and pay you $1,007 per month (in today’s dollars). Suppose you continue working between the ages of 62 and 66 and 6 months and earn so much that all benefits in those years are withheld. In that case, Social Security would pay you $1,300 a month starting at age 66 and 6 months.
You can see that there’s a lot of inter-play between the different rules, and it can be difficult to estimate the net effect. The best approach is to use one of the Social Security benefit calculators available on the web, including the one on the Social Security website that’s available after you establish a “my Social Security” account. Run different scenarios through the calculators to get an idea of the likely results.