Social Security Eligibility While You're Still Working

Source: BIGSTOCK.

You can file for Social Security as early as 62, and you're free to continue to work after you claim your benefits. However, depending on how old you are and how much money you earn, your monthly benefit amount could be temporarily reduced as a result. Here's what you need to know about Social Security eligibility while you're still working, and what can happen if your benefits are reduced.

Can you work and collect Social Security?
The short answer: It depends. There are three separate age groups that Social Security "retirees" fit into that determine how much can be earned without a benefit reduction.

The first group includes retirees who haven't reached their full retirement age (FRA) and won't reach it in the current calendar year. As you might imagine, the rules are most restrictive when it comes to these individuals. In the next group are those retirees who will reach FRA during the current year, but haven't yet. The final group includes people who collect Social Security and are past their FRA -- this group is free to work and earn as much as they want without any benefit reduction whatsoever.

For the first two groups, an earnings test is applied. A portion of earnings are exempt for Social Security purposes, and any earnings above the exempt amount will result in a benefit reduction. It's also worth mentioning that only wage income and net earnings from self-employment count -- other sources of income such as investment earnings, interest income, pensions, and annuities don't factor into the earnings test.

In the years before you reach normal retirement age
As I mentioned, the rules regarding Social Security eligibility are the most restrictive for those individuals who haven't reached their FRA yet, which is 66 years of age for those born from 1943 to 1954.

For this group, the first $15,720 in earnings is exempt from the earnings test for the 2016 calendar year. For every $2 in earnings above this amount, Social Security benefits are reduced by $1.

As an example, let's say that you file for Social Security as early as possible (age 62) and that during the following calendar year you earn $25,000. According to the earnings test, you've exceeded the exemption amount by $9,280. Since your benefit is reduced by $1 for every $2 over the exemption, your Social Security benefit will be reduced by $4,640 for the year.

In the year you'll reach normal retirement age
For individuals who will attain FRA during the current calendar year, but haven't done so yet, a much more generous earnings test is applied.

In this case, $41,880 in income is exempt, and the reduction is $1 for every $3 above this amount. Furthermore, only earnings in the months prior to reaching FRA are counted; earnings during the month you'll reach retirement age don't factor into the total.

For example, if you are going to reach FRA in August 2016, the earnings test will only consider your wages earned from January through July.

Let's say that you earn $50,000 before August 2016. This means that you would have exceeded the earnings test exemption by $8,120. Since your benefit is reduced by one-third of this amount, your 2016 Social Security benefits would be reduced by $2,707.

Just to summarize the earnings test, here's a reference chart:

If you think your Social Security may be affected by your earnings, the Social Security Administration provides a calculator to estimate your potential benefit reduction.

The good news for older workers
Having said all of that, it's important to mention that any reduction amount isn't lost. Rather, any month in which you don't receive benefits due to the reduction will be treated as increasing the age at which you claimed Social Security, which in turn will increase your future benefit amount once you reach FRA.

Additionally, even though working can reduce or even eliminate your Social Security benefit before you reach your FRA, it could result in a future benefit increase. Your Social Security benefit is calculated based on an inflation-weighted average of your 35 highest-earning years. So, if your earnings while already collecting Social Security are among your highest, they can boost your average earnings and thus your future benefit.

In other words, working while receiving Social Security benefits could increase your future benefits in two different ways.

The Foolish bottom line
To sum it up, you are free to work and earn as much as possible after you file for Social Security. If you haven't reached your normal retirement age yet, it could result in a benefit reduction, but you'll get the money back eventually -- and possibly increase your calculated benefit amount in the process.