Many people work after they retire and start to receive Social Security benefits. If you are considering this possibility, you also need to be aware of the potential impact that earned income can have on these benefits. To the extent that your circumstances allow you to plan ahead, you should understand your options as well as the tradeoffs that making choices always entail. What follows is a look at common consequences of various paths that you might consider when eligibility for retirement benefits nears and also after you have begun to receive these benefits.

Your Full Retirement Age is the Key if You Work after Retiring

To figure out the impact of earned income on Social Security benefits after retirement, you need to know your Full Retirement Age (FRA). As a side note, the Social Security Administration  (SSA) sometimes discusses Normal Retirement Age. Whenever you see that term, you need to realize that it actually is the same as Full Retirement Age, which is the term that will be used here. Now, assuming that you decide to take early retirement but decide that you want, or need, to supplement your benefits by continuing to work, you also should understand how your age and earnings will affect the monthly amount that you are entitled to receive from the SSA. Before looking at the specifics, some discussion of the meanings of the terminology used by Social Security should be set forth.

Your Full Retirement Age depends on your date of birth. If you review Social Security’s FRA chart, you will see that this term actually applies to eligibility for retirement, spouse’s, and widow(er)’s benefits. The focus here is on the worker so what follows is specifically about retirement (or “old-age”) benefits, but the underlying concepts can be adapted to the other categories as well. With this in mind, a worker’s Full Retirement Age can range from 65 to 67 years under the current law.

If you were born on January 1, 1938 or earlier, your FRA was reached on your 65th birthday. At this point, your age will not affect your Social Security benefits, but, as will be mentioned later, your earnings still could play a role. In fact, anyone born before 1954 will have reached the applicable Full Retirement Age prior to 2020. As the chart regarding FRA shows, a person born before January 2, 1955 has a FRA of 66. As of May, 2020, those born after this date will have a Full Retirement Age that increases by 2 months every year until it reaches 67 years for everyone born after January 1, 1960. With this in mind, we will look at who is eligible for early retirement and also consider the impact of earnings on their Social Security benefits.

Also, you should remember that, even if you do not earn income, you will receive reduced Social Security benefits if you choose to retire prior to your Full Retirement Age. How this is calculated will not be detailed here. However, if you want to see how the SSA determines the reduced benefits, you could review RS 00615.001 of the POMS regarding Reduced RIB (i.e., Retirement Insurance Benefits).

Criteria for Eligibility for Early Retirement Benefits

If you want to retire prior to reaching your Full Retirement Age, you must be at least 62 years old and fully insured to be eligible for early payment of your Social Security benefits. You also must file an application with the Social Security Administration. If you turn 62 on the first day of the month, you could be entitled to early retirement benefits for that month. Otherwise, you could apply and be entitled to your Social Security benefits for the following month (POMS RS 00201.001). Finally, with this overview of early retirement as a foundation, we can explore the ins and outs of earned income for Social Security recipients.

For Years Prior to the Year When FRA is Reached

For a person who will not reach Full Retirement Age during the current calendar year the Social Security Administration uses two formulas for calculations when there is a cost-of-living adjustment for Social Security benefits announced in December of the preceding year. Of the two calculated figures, the larger monthly amount is multiplied by 12 to determine what is called the Lower Exempt Amount, which is used during the years prior to the year that you reach your FRA. As the calculations involved can be difficult to follow, Social Security publishes a chart of the Lower Exempt Amounts through the current year. For example, in 2020, the applicable amount is $18,240.

Simply put, your Social Security benefits are not affected if your earned income would not exceed $18,240 for all of 2020. However, as soon as you earn your first dollar above this amount in this year, your retirement benefits will be reduced. It should be noted that the reduction in benefits before you reach your Full Retirement Age are not permanently forfeited. Instead, after reaching your FRA, your retirement benefits will be adjusted to an increased amount that repays the amounts that your Social Security benefits were reduced due to earnings in any prior months.

In any calendar year prior to the year in which you reach your FRA, you are permitted to earn up to the Lower Exempt Amount while still being entitled to receive your entire early retirement benefit amount. For every $2 in earned income above the Lower Exempt Amount, you will lose have $1 of your Social Security benefits. Since the annual earned income limit is $18,240 in 2020, this is what you can earn without retirement benefits being affected.

As an example, if you would receive $12,000 in Social Security benefits during the year but also earned $42,240 from working, then – after subtracting the $18,240 from your total earnings – you would have $24,000 in income remaining. The remaining amount will lead to a reduction in these benefits. Since the amount is $24,000, this would result in a reduction of $12,000 in your Social Security benefits for 2020. In the end, you would not be entitled to any of payments from the SSA for 2020.

However, this reduction begins with the month that you first are eligible to receive Social Security benefits. In other words, in the year that you start to receive these benefits, your earnings prior to the month that your Social Security starts are not included in the calculation of the reduction of your benefits. Whenever you receive benefits throughout the entire year, then the Social Security Administration tracks your earned income for all 12 months of the calendar year and will base any reduction in Social Security benefits on all of your income for the year. If you began to get Social Security in July, then the SSA looks at earnings for July through December when determining if you exceeded the Lower Exempt Amount.

In Year that You Reach FRA

In the year of your birthday when you reach your Full Retirement Age, the Social Security Administration approaches earned income from a different perspective. Annually, it calculates a Higher Exempt Amount, which is the earned income that a person can receive before work could lead to a reduction of your Social Security benefits. For 2020, this equals $48,600 (according to the chart of exempt amounts since 1984 on the SSA website) – this amount is adjusted every December based on any cost-of-living increase announced by Social Security. In 2020, you can earn income up to $48,600 during the months prior to the month of your birthday when you will attain your FRA. As an example, if your birthday is in September, you would face a reduction in your Social Security benefits only if your earnings through August exceed $48,600. Provided that this occurs, the SSA also uses a different formula to calculate the benefit reduction. In this situation, the reduced Social Security benefits will equal the loss of $1 for every $3 of earned income.

In the Month that You Reach FRA and the Rest of the Year

As of the month that you reach Full Retirement Age, your earnings no longer can have a negative effect on the amount of your Social Security benefits. Put simply, no matter how much you earn after this point, the Social Security Administration will pay the entire benefit amount to which you are entitled.

In Any Year After You Have Reached FRA

For every calendar year after the year that you have reached your Full Retirement Age, you do not have to worry about reductions due to earned income. Under the current law, you are not subject to any annual earnings limit that will reduce your Social Security benefits.

Income Always Can Indirectly Reduce Social Security Benefits

Taxation of benefits can apply whenever you receive Social Security benefits. The IRS looks at unearned as well as earned income. Its basic definition of “income” will focus on your adjusted gross income plus nontaxable interest income plus half of your Social Security benefits. The Internal Revenue Code has two income brackets that determine when income taxes are levied on Social Security benefits due to income. Under the current Internal Revenue Code, individuals with income between $25,000 and $34,000 and married couples filing jointly whose combined incomes range from $32,000 to $44,000 can have up to 50 percent of their benefits subject to income taxation. Additionally, if an individual’s income (as defined above) exceeds $34,000 or a married couple filing jointly has income exceeding $44,000, the IRS can tax up to 85 percent of Social Security benefits. For a more detailed look at this subject, Publication 915 from the Internal Revenue Service is a good source.

Can Work Have a Beneficial Effect on Social Security Benefits?

The answer is yes, and the reason is that your future benefits can increase when FICA taxes are deducted from your earnings and then credited to your work record by the Social Security Administration. The key is the level of earnings in any year that you worked while receiving benefits.

Generally, the SSA determines your Social Security benefits using earnings from your work history before you retired. However, if your earnings during a post-retirement year are more than what you earned in a year used in the initial calculation, the post-retirement year is substituted for the year with lower earnings, and the SSA will undertake a recomputation of retirement benefits. Payment of the new higher amount actually begins in January of the year that follows the year when you had the post-retirement earnings so you also may receive retroactive benefits equal to the increase in benefits starting from that month to the present time.

A Final Note: Contacting the SSA about Changes in Earned Income

If you decide to retire early, you should contact the Social Security Administration whenever there are changes in your earned income. This will reduce the possibility of overpayments that the Social Security Administration may attempt to recover when delays in adjusting your benefits after your earnings rise, which would cause your Social Security benefits to be overpaid. When the SSA realizes that this has happened, it will seek to recover this amount. Because the SSA changes its benefit payments to you based on the amount that you expect to earn in a given year, you would want to report updated (and more accurate) earnings information during the year. This particularly is true if you underestimate your income at first since this would lead to an overpayment of Social Security benefits during the year, and that excess amount will be deducted from your benefits during the following year. Bear in mind that, when the Social Security Administration determines that you have been overpaid, it might keep at least part your monthly Social Security benefits until the amount that has been withheld equals the amount of the overpayment. Quick reporting of changes of your earnings is your best bet for avoiding these problems.