Social Security: How Working While Collecting Affects Your Benefits

Are you thinking about collecting your Social Security retirement benefit while you continue to work?  Learn how working while collecting impacts how much you will receive.

For those close to retirement, you may not be aware that if you begin collecting your Social Security retirement benefit while continuing to work, the amount you receive may be reduced.  Not to worry, here is a rundown of the rules that apply to this situation. 

Full Retirement Age & Full Retirement Benefit

Recall from Part I – Your Retirement Benefit that Full Retirement Age (FRA) is the age when you become eligible to collect your unreduced retirement benefit from Social Security.  This age is important because collecting before you reach FRA will reduce your benefit permanently; collecting after you reach FRA will have the opposite effect.  The earliest you can collect Social Security is age 62 and the latest you can delay is age 70.

The permanent reduction you experience for collecting your benefit before reaching FRA is different from the reduction that applies to your benefit if you continue working while collecting Social Security.  The reductions experienced while working and collecting are only temporary and will accrue to you in the form of higher future benefits when you reach your full retirement age.

Collecting Benefits Before Your Full Retirement Age  

In 2021, if you have not yet reached your FRA, have started collecting a Social Security retirement benefit, and you are still working, your benefit will be reduced by $1 for every $2 you earn above $18,960.  This applies if you’re collecting a benefit based on your own earnings history or if you’re collecting a survivor benefit.  According to the Social Security Administration, the calculation to determine your income includes only wages from your job and any net income you earn from self-employment.  Income received from pensions, annuities, investment distributions, and interest is not counted towards the threshold.  Here is an example:

• You’re working and earn $25,000 for the year. Your wages will have exceeded the threshold by $6,040 which will result in a $3,020 reduction to your benefit.

Collecting Benefits In The Year You Reach Full Retirement Age 

In the year you reach full retirement age, the income threshold rises, and the amount withheld for exceeding it is reduced.  In 2021, your benefit will be reduced by $1 for every $3 you earn above $50,520.  Again, this applies if you’re collecting a benefit based on your own earnings history or if you’re collecting a survivor benefit.  A caveat to this is that the reduction only applies in the months leading up to your full retirement age.  In the month you reach FRA, the Social Security Administration applies a special rule that eliminates the benefit reduction regardless of how much money you earn.  Here is an example:

• You’re working and earn $60,000 for the year. Your wages will have exceeded the threshold by $9,480 which will result in a $3,160 reduction to your benefit.  If you begin collecting your retirement benefit in the month you reach FRA or any time after that, there will be no reduction to the amount you receive.

How The Reduction Is Performed

When you apply to start your retirement benefits, the Social Security Administration makes a calculation based on the information you provide about your expected earnings for the upcoming year.  The reduction amount that is calculated is divided by your monthly benefit amount to determine the number of months you will not receive a benefit.  The number of months is always rounded up to the next whole month.  Here is an example:

• Your Social Security retirement benefit is $2,500 per month and your reduction amount for the year is $3,400. This results in 1.36 months of reduced benefits ($3,400 / $2,500).  Since the Social Security Administration does not pay partial monthly payments based on estimated earnings, it rounds up to the next whole number of months.  You will therefore not receive a benefit for the first two months after filing.  This will result in you having $5,000 of your annual retirement benefit withheld.  The difference between what is withheld and the reduction amount calculated is $1,600 ($5,000 – $3,400).

Higher Benefits Later

If some of your retirement benefits are withheld because your income exceeded the limits in a given year, your monthly retirement benefit will be increased when you reach FRA to account for the months you did not receive a payment.  Moreover, by continuing to work while receiving Social Security retirement benefits, you continue accruing credit for your earned income.  If your income while collecting benefits turns out to be one of your highest 35-years of earnings, your retirement benefit will be increased in December of the following year.  This is done automatically, as the Social Security Administration reviews each person’s earnings history annually.