Americans can start receiving monthly Social Security retirement checks as early as age 62. However, that doesn’t mean you actually have to retire.
Lots of people love what they do for a living. They like the idea of staying busy and earning money while receiving an extra amount from Social Security. But there is a catch with this plan. Here’s the biggest problem with working after applying for Social Security retirement benefits.
Uncle Sam’s recovery
Chances are your monthly Social Security check will be significantly reduced if you apply for benefits before full retirement age and continue to work. Why? You could call it Uncle Sam’s recovery.
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The Social Security Administration (SSA) doesn’t want to encourage people to claim benefits early and keep working. The main way the agency discourages this is by suspending benefits if individuals earn too much money working.
The SSA uses two thresholds to determine the amount to withhold – the lowest exempt amount and the highest exempt amount. The lower exempt amount applies to those who will reach full retirement age after 2023. This amount will be $21,240 in 2023. The higher exemption amount only applies to those who reach full retirement age in 2023. This amount will be $56,250 next year.
The agency will withhold $1 in Social Security retirement benefits for every $2 earned above the lower exempt amount. It will withhold $1 in benefits for every $3 earned above the highest exempt amount.
It is important to note that the SSA only counts earnings from employment (including self-employment). It does not take into account money you earn from annuities, capital gains, interest, investments, pensions or other government benefits towards the lower or higher exempt amounts.
Suppose your full retirement age is 67 but you apply for Social Security benefits at age 62. You continue to work and earn $50,000 a year. The SSA will withhold $14,380 in benefits, which is half the difference between your $50,000 earned and the lower exempt amount of $21,240.
Now suppose you reach full retirement age of 67 towards the end of next year. You work in the meantime (while receiving monthly Social Security checks) and earn $70,000. The SSA will withhold $4,583.33, or one-third of the difference between your $70,000 earned and the highest exempt amount of $56,250.
Some good news
There’s good news if you were hoping to continue working while receiving Social Security benefits. You will not lose the amount recovered by Uncle Sam forever.
After reaching full retirement age, your monthly check will increase to include previously withheld benefits. However, the SSA will not give you all the money at once. The agency uses a formula to recalculate your monthly benefit.
Also, continuing to work after applying for Social Security could increase your monthly benefit in another way. The SSA uses the highest 35 years of earnings to calculate your benefit. If you continue to work after you file for Social Security and you have one or more of your highest earning years, the agency will increase your monthly benefit accordingly.
Waiting has its rewards
While you won’t be giving up Social Security deductions permanently, waiting to file a claim for benefits if you plan to continue working has its advantages. Applying for Social Security before full retirement age — especially earlier than age 62 — can cost you dearly in the long run.
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