In today’s world of early or semi-retirement, many people wonder when they should begin taking their Social Security benefits. The combination of Social Security and working can complicate matters a bit. You can begin taking your benefit as early as age 62, but that is not always the best choice for many retirees. If you are working either at a job where you are employed or some sort of self-employment, you need to analyze the pros and cons based on your situation.
Full retirement age
Your full retirement age or FRA is the age at which you become eligible for a full, unreduced retirement benefit. FRA is an important piece in understanding the potential implications of working on your Social Security benefit.
Your FRA depends on when you born:
- If you were born from 1943 -1954 your full retirement age is 66
- If you were born in 1955 your FRA is 66 and two months
- If you were born in 1956 your FRA is 66 and four months
- If you were born in 1957 your FRA is 66 and six months
- If you were born in 1958 your FRA is 66 and eight months
- If you were born in 1959 your FRA is 66 and ten months
- If you were born in 1960 or later your FRA is 67
Source: Social Security
Social Security and working
If you are working, collecting a Social Security benefit and younger than your FRA your benefits will be reduced by $1 for every $2 that your earned income exceeds the annual limit which is $21,240 for 2023. Earned income is defined as income from employment or self-employment. Income from sources like a pension, veteran’s benefits, investment income, interest income or government and military retirement benefits are not included as earned income.
During the year in which you reach your full retirement age the annual limit is increased. For 2023 this increased limit is $56,520. The benefit reduction is reduced to $1 for every $3 of earnings over the limit.
This chart shows the monthly reduction of benefits at three levels of earned income for 2021.
Reduction of Benefits – 2023
| Age | $25,000 earned income | $60,000 earned income | $75,000 earned income |
| Younger than FRA | $157 per month reduction | $1,615 per month reduction | $2,240 per month reduction |
| Year in which you reach FRA | No reduction | $97 per month reduction | $513 per month reduction |
| FRA or older | No reduction | No reduction | No reduction |
Source: Social Security
Temporary loss of benefits
The loss of benefits is temporary versus permanent. Any benefit reduction due to earnings above the threshold will be recovered once you reach your FRA on a gradual basis over a number of years. Additionally, if your earnings during these extra years of work rank among your 35 highest earning years, this will serve to increase your benefit calculation and will result in an increased benefit amount.
A one-time do-over
Everyone is allowed a one-time do-over to withdraw their benefit within one year of the start date of receiving their initial benefit. This is allowed once during your lifetime. This is called withdrawing your benefit.
One reason you might consider this is going back to work and earning more than you had initially anticipated. This is a way to avoid having your benefit reduced. You would reapply later when you’ve reached your FRA, or your earned income is under the limit. Your benefit would increase due to your age and any cost-of-living increases that might occur during this time.
If you do take advantage of this one-time do-over, you must pay back any benefits received. This includes not only any Social Security benefits that you received, but also:
- Any benefits paid based upon your earnings record such as spousal or dependent benefits.
- Any money that may have been withheld from your benefits such as taxes or Medicare premiums.
Social Security and income taxes
Regardless of your age or the source of your income, Social Security benefits can be taxed based upon your income level. This could certainly be impacted from income earned from employment or self-employment, but it also includes other sources of taxable income such as pension or investment income.
The amount of the benefit that is subject to taxes is based upon your combined income, which is defined as: adjusted gross income + non-taxable interest income (typically from municipal bonds) + ½ of your Social Security benefit.
The tax levels are:
| Tax filing status | Combined income | % of your benefit that will be taxed |
| Single | $25,000 – $34,000 | Up to 50% |
| Single | Over $34,000 | Up to 85% |
| Married filing jointly | $32,000 – $44,000 | Up to 50% |
| Married filing jointly | Over $44,000 | Up to 85% |
Source: Social Security
The Bottom Line
The decision when to take your Social Security benefit depends on many factors. If you are working or self-employed you will want to consider the impact that your earned income will have on your benefit.
You should also understand that your benefits can be subject to taxes at any age over certain levels of combined income, regardless of the source of that income.
Approaching retirement and want another opinion on where you stand? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed advice about your situation.
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