This article was updated on August 24, 2017, and originally published on April 9, 2016.
For U.S. seniors, there's probably no program more vital to their long-term ability to meet their month-to-month expenses than Social Security.
Seniors rely on Social Security
At the moment there are more than 61 million people receiving a monthly Social Security benefit, of which just under 42 million are retired workers. The Social Security Administration suggests that seniors not rely on Social Security benefits to replace more than 40% of their working wages come retirement, but in many instances we're discovering that seniors and pre-retirees are paying little heed to this advice.
An AARP study released in September 2015 asked nearly 1,200 pre-retirees between 45 and 64 how much they planned to rely on Social Security in retirement. They did this by quantifying what percentage of household income Social Security benefits were expected to make up. About half (49%) of the respondents followed the SSA's guidance and anticipate Social Security income will comprise 40% or less of household income in retirement. However, the other half (51%) of respondents expect their Social Security benefits to represent a major source of income. Nearly a quarter (23%) of respondents anticipate Social Security benefits will represent 71% to 100% of their income in retirement.
Why are so many pre-retirees and retirees reliant on Social Security? The answer can likely be found in America's poor personal savings rate which trails most developed countries.
Far too many seniors are entering retirement today with an insufficient nest egg, and are thus forced to be reliant on Social Security income during their golden years. This is a big reason we've witnessed more seniors than ever delaying their retirement, with some even coming out of retirement in order to earn additional income as a member of the labor force during their golden years.
How much can I earn and still collect?
But, what happens to seniors who are simultaneously working and receiving a Social Security benefit? For many people the answer to whether you can earn income/wages and still collect a Social Security benefit is a gigantic mystery. Today we're going to solve that mystery.
The short, sweet answer is that yes, you can work and receive your entitled Social Security benefits, but there are some catches that apply mainly to when you decide to file for benefits.
The biggest differentiating factor is going to be whether you file for benefits before or after your full retirement age, or FRA. Your FRA is a dynamic number determined by your birth year that signifies when you're entitled to receive 100% of your Social Security benefits. If you retire before you reach you FRA, you'll receive a monthly benefit that's lower than 100%. If you happen to retire after your FRA, your benefit could exceed 100%. For anyone born between 1943 and 1954, your FRA is 66 years, with each additional year of waiting between age 62 and age 70 translating to about 8% growth in your monthly benefit. The chart below provides a solid visualization of how an individuals' benefit rises (on a monthly basis) the longer they wait to sign up.
Utilizing an FRA of 66 years, as an example, gives us three scenarios to determine whether you can work and also receive Social Security benefits.
1. Filed for benefits before FRA: If you file for Social Security benefits before reaching your FRA, the SSA limits your full-year earnings ability to $16,920 as of 2017. This works out to $1,410 per month. This is the amount the SSA says is OK to earn without it adversely impacting your benefits. However, for each $2 earned in excess of $16,920 in 2017, $1 will be deducted from your benefits.
For example, if you're 64 years old, taking home $1,100 a month in Social Security benefits ($13,200 annually), and you earn $24,000 in wages in 2017, you can expect the SSA to reduce your 2017 annual benefit by $3,540 ($24,000 minus $16,920, then divided by $2). Your net benefit would be $9,660.
2. If you'll reach FRA in 2017: There's a special scenario in place for seniors who are working that are expected to reach their FRA (i.e., turn 66 years old) in the current calendar year. In this instance, the SSA allows a substantially higher limit before deductions kick in ($44,880 in 2017), and the deduction is only $1 from your benefits for each $3 in earned income above and beyond $44,880.
For instance, imagine your 66th birthday is in November 2017 and you earn $50,000 in wages between January and October. Using our example above of $1,100 in monthly benefit payments, our fictitious 65-year-old senior would have roughly $1,707 deducted from their annual benefits ($50,000 minus $44,880, then divided by $3).
3. Filed for benefits at or after your FRA: Finally, if you've already reached your FRA or beyond, the SSA allows you to earn as much as you want during the year in wages and still collect all of the Social Security benefit you may be due.
Another thing that could probably use some clarification is what counts as income. According to the SSA, wages paid to you from an employer, and net earnings from self-employment count toward your annual earnings limit. What doesn't count are other government benefits, interest, pensions, annuities, capital gains, and investment earnings. So by all means, keep investing.
Three special perks of working while collecting Social Security benefits
Additionally, working while collecting benefits could have its perks, according to the SSA.
First, benefits deducted prior to hitting your FRA because you've earned too much in the eyes of the SSA will actually boost your benefits once you surpass your FRA. Thus, if you file for benefits before your FRA and a substantial portion (or all) or of your benefits are withheld, you could be looking at a nice boost in monthly benefits once you hit your FRA as those benefits are returned to you.
Secondly, the SSA averages out your income over your 35 highest-earning years in order to determine your benefit. If you happen to earn more in 2017, or a future year, than you did in a year say 10, 20, or 30 years ago, your new year of earnings could replace a lower previous year of income and boost your benefit payment.
Lastly, the SSA has a special rule in place for first-year retirees who are below their FRA and earn $1,410 or less per month. An example offered by the SSA is a retiree that chooses to retire at the end of October 2017. Even if this individual has earned well above the aforementioned limits of $16,920 or $44,880, depending on their age, as long as he or she earns equal to or less than $1,410 in November and December, he or she would receive the entirety of their benefit payment.