These are the basics regarding Social Security:
Social Security Full Retirement Age (FRA) is age 67 for those born in 1960 or later, and age 66 if born before 1960.
You will receive your "full" benefit (estimated on your S.S. statement) at your FRA (age 66 or 67). But once you reach age 62, you have the option to claim a reduced benefit (a "full" benefit is reduced by ~30% if you claim at age 62,
or ~7% for each year that you claim earlier than your FRA). Whether you claim early, or wait until age 70 to claim (maximizing your benefit), you will end up breaking even around age 80. Some will advise you to wait as long as possible to claim so that you will receive a larger benefit (could be beneficial if you expect to live past age 80), and some will tell you to claim as early as possible, even if you don't need the money, so that you can either save or invest that income. That's a personal decision, but if you need the income for expenses you probably shouldn't wait to claim any longer than you need to. Some will also tell you that you can claim S.S. and continue to work, so that you have two income sources.
This is technically true, and having two income sources sounds great, but this is where you need to be careful.
If you claim Social Security before your FRA, and continue to work, even part time, beware of the potential for your benefit to be partially or significantly reduced, or even completely withheld.
Here's how it works:
If you earn more than $24,480 in the year that you claim, your benefit will be reduced by $1 for every $2 over that limit.
If you earn $24,480 or less, you will receive your total expected benefit.
But, for example, if your expected benefit was $36,000/year ($3,000/month) and you earn $50,000 in that year, $12,760/year ($1,063/month) would be withheld from your benefit, reducing it to a little less than $2,000/month.
$50,000 - $24,480 = $25,520 over the income limit.
$25,520/2 ($1 for every $2 over the limit gets withheld) = $12,760/year withheld.
$12,760/12 = $1,063/month withheld.
To take this one step further, if your earned income reaches $100,000/year, your benefit would be completely withheld.
$100,000 - $24,480 = $75,520 over the income limit.
$75,520/2 = $37,760/year withheld.
$37,760/12 = $3,146/month withheld, which is more than your entire $3,000 benefit.
How does S.S. know how much you will make in the year that you claim so that they can adjust your benefit amount? They will ask you how much you expect to earn from the time you claim until the end of that year, and then again at the beginning of each year, up until your FRA. If you end up overestimating your final income for any year, they will adjust your future benefit (over time) to reflect the fact that too much was withheld. However, if you underestimate the final income amount (which they will see on your taxes), they will expect you to pay the overage back!
This changes slightly in your FRA year.
That year, the income limit rises to $65,160/year, so if you earn more than that amount, $1 for every $3 over that limit will be withheld. This applies up until the month that you reach your FRA (not necessarily the entire year).
Once you reach your FRA, there are no income limits and you will receive your total benefit without any reductions.
Beware claiming S.S. before your FRA if you plan on continuing to work, at least if you expect to earn more than the income limits. If you continue to work at, or after, your FRA, consider claiming Social Security at your FRA and not wait any longer. Why?
• There are no income limitations once you reach your FRA, so you can fully benefit from having two income sources.
• Since you are still working, the reported income gets added to your 35 years of reported annual income (which is what your benefit is based on), potentially increasing your future benefit if it replaces any lower, inflation adjusted amounts in the past 35 years, even if you have already claimed.
- By the way, any part of your benefit that might get withheld is not lost. It will be factored back into your benefit (over many years) once you have reached your FRA.
So, should you claim S.S. and continue to work? If it is before your FRA, that depends on how much you expect to make, and whether a reduced benefit (if needed) would still be beneficial enough for you, compared to waiting to receive a larger benefit. If it will be after you have reached your FRA, sure, there is no downside because there are no income limitations that might reduce your benefit.