Working While Receiving Social Security

[Hank Gowdy, Dick Rudolph, Lefty Tyler, Joey Connolly, Oscar Dugey (baseball)] (LOC) (Photo credit: The Library of Congress)

For many folks, starting to receive Social Security as early as possible is important – even if they’re still actively working and earning a living.

Something happens when you do this though: depending on how much you’re earning, you will be giving up a portion of the Social Security benefit that you would otherwise receive.  Up to the year that you will reach Full Retirement Age, for every two dollars that you earn over the annual limit ($14,640 for 2012, or $1,220 per month), your Social Security benefit will be reduced by one dollar.

Then in the year you will reach Full Retirement Age (FRA) there is a different income limit – actually $3,240 per month.  For every three dollars over that limit, your Social Security benefit will be reduced by one dollar – up until the month that you actually reach FRA.  Once you’ve reached FRA, there is no income limit, and you can earn as much as you want, without any of the reductions that are applied to earnings prior to FRA.

These reductions aren’t  lost – you’ll actually get credit for them later on at FRA.  So if you’re earning enough (for example) to reduce your benefit down to a point where your benefit is eliminated, you’ll get credit for that “lost” month once you reach FRA.

As you most likely already know, your Social Security benefit is reduced based upon the number of months prior to FRA that you’ve applied for and begin receiving benefits.  For every month that your benefit is eliminated (or reduced and withheld by SSA) prior to FRA, these months will be credited back to your account, reducing the number of months that were originally used to calculate your reduced early retirement benefit.

As with all of these explanations, an example is in order.  Dick, age 62, has a Primary Insurance Amount of $2,000.  When he files for benefits at age 62 his benefit is reduced by 25%, to $1,500.  Dick is still working, and his job pays him $60,000 per year ($5,000 per month).  With that income, Dick’s Social Security benefit will be reduced by $2 for each dollar over $1,220 that he earns.  So $5,000 minus $1,220 equals $3,780, so his benefit will be reduced by $1,890 – more than his benefit.  This means his benefit will be completely withheld.

When Dick reaches FRA, assuming he’s continued earning at that same pace up to that point, he will begin receiving his benefit at the same amount as if he had waited until FRA to apply for the benefit.  This is because he’s gotten credit back for all of those months that he had his benefit withheld.

Why would Dick do this, you might ask?  One reason might be if he had dependents, such as his wife and/or children, that could receive benefits based on his record if he’s actively filed.  Even though his benefit is being withheld, the dependents’ benefits can continue – these benefits are limited by the income of the individual receiving them.  So if his wife was receiving Spousal Benefits based on his record, she would have the same earnings limits as listed above, and the same goes for the children.