Last week we covered the basics of Social Security, which set the stage as we begin to take a deeper dive into the intricacies of Social Security – especially regarding taxation and the possibility of reduced benefits. This week we cover how working, while receiving Social Security, can affect your benefit amount.
Timing is an important piece of the puzzle as you’re trying to decide when to start drawing on your Social Security benefit. Everyone asks the question, “What’s the best age to start receiving retirement benefits?” The answer is that there’s not a single “best age” for everyone, and ultimately it’s your choice. With that being said, there are considerations that can help guide you in the right direction.
Previously, we covered how at Full Retirement Age (FRA) you can expect to receive your full Social Security benefit. You also learned that filing before or after FRA will forever decrease or increase your benefit, respectively. Beyond what age you should begin taking Social Security, it’s also important to understand how working while collecting your benefit could potentially reduce your payment amount.
If you have not yet made it to FRA and are continuing to work, it’s possible that your benefit will be reduced depending on how old you are and how much money you’ve made in that year. Below is a chart that illustrates the income thresholds and the corresponding reductions:
Assuming you continue to work and are younger than FRA for the entire year, your benefit will be reduced by $1 for every $2 over the limit, $18,240. If you will reach FRA in that year, the threshold is increased to $48,600 and you receive a more favorable reduction of $1 for every $3 over the limit. Once you reach FRA, there is no longer a reduction in your benefits.
It’s important to note that the amount that your benefits are reduced, however, isn’t truly lost. Your benefit will increase at your full retirement age to account for benefits withheld due to earlier earnings.
Let’s use an example. Assume that you are 65, FRA is 67, you are still working and your income is $28,240. This is $10,000 over the income limit of $18,240 which means that your benefit will be reduced by $1 for every $2 over the limit, or by $5,000. Is beginning to draw on Social Security the best option for them?
Assuming they don’t need the Social Security income, would it still make sense for them to begin drawing prior to FRA? In this scenario, there would likely be a greater benefit in waiting until at least FRA. Not only will they avoid a temporary reduction in benefit, but they will receive a permanent increase in their benefit in contrast to filing prior to FRA. It’s possible that it makes sense for them to delay filing until age 70 to get the maximum increased benefit. Longevity, age, and income are all going to play an integral part in deciding at what age to file for Social Security.
With that being said, a strategy that’s good for you may not be the best for someone else. While there’s no perfect age, everybody’s situation is different which is why it’s important to work with a financial professional to ensure you’re implementing the right strategy for your specific situation. Next week, we will take a break from posting to spend Thanksgiving with our loved ones, but the following week you can look forward to gaining a better understanding of how Social Security benefits can be taxed. We wish everyone a safe and Happy Thanksgiving!
Derek Prusa, CFA, CFP® and Ben Webster, CFP®
Co-Founders and Owners of Aspire Wealth
Introduction to Social Security
