Americans can begin receiving monthly Social Security retirement checks as early as age 62. However, that doesn't mean that you actually have to retire.
Many people enjoy what they do for a living. They like the idea of staying busy and making money while also receiving an extra amount from Social Security. But there's a catch with this plan. Here's the biggest problem with working after you claim Social Security retirement benefits.
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Uncle Sam's clawback
There's a good chance that your monthly Social Security check will be reduced significantly if you claim benefits before your full retirement age and continue to work. Why? You could call it Uncle Sam's clawback.
The Social Security Administration (SSA) doesn't want to encourage people to claim benefits early and keep working. The main way the agency disincentivizes this is to withhold benefits if individuals earn too much money from working.
SSA uses two thresholds in determining how much to withhold -- the lower exempt amount and the higher exempt amount. The lower exempt amount applies to people who will reach their full retirement age after 2023. This amount will be $21,240 in 2023. The higher exempt amount only applies to people who will reach their 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 higher exempt amount.
Importantly, SSA only withholds earnings from employment (including self-employment). It doesn't count any money you make from annuities, capital gains, interest, investments, pensions, or other government benefits toward either the lower or higher exempt amounts.
Suppose your full retirement age is 67 but you claim Social Security benefits at age 62. You continue to work and earn $50,000 in a year. SSA will withhold $14,380 in benefits -- half of the difference between your $50,000 earned and the lower exempt amount of $21,240.
Now suppose you'll reach your full retirement age of 67 near the end of next year. You work in the meantime (while receiving monthly Social Security checks) and earn $70,000. SSA will withhold $4,583.33 -- one-third of the difference between your $70,000 earned and the higher exempt amount of $56,250.
Some good news
There's some good news if you were hoping to keep working while receiving Social Security benefits. You won't lose out on the amount clawed back by Uncle Sam forever.
After you hit your full retirement age, your monthly check will increase to include the previously withheld benefits. SSA won't give you all of the money at once, though. The agency uses a formula to recalculate your monthly benefit.
Also, continuing to work after claiming Social Security could boost your monthly benefit in another way. SSA uses the 35 highest earnings years to calculate your benefit. If you keep working after filing for Social Security and have one or more of your highest earnings years, the agency will increase your monthly benefit accordingly.
Waiting has its rewards
Even though you won't forego the Social Security withholdings permanently, waiting to file for benefits if you plan to keep working has its rewards. Claiming Social Security before your full retirement age -- especially at the earliest age of 62 -- can cost you a lot over the long term.
