Friday, February 25, 2011

Collecting Social Security While Continuing To Work - What Are The Rules?

"Isn't there an age that I don't have to worry about it anymore ... when I can work as much as I want without losing my social security?  In fact, I thought at age 65 I didn't have to pay tax on it anymore either!

I have been asked these questions enough times that I realize there are many misconceptions about them.  Please continue reading to get some of the answers ...

Explaining "Normal Retirement Age"

Normal Retirement Age is the age at which you can receive your full monthly Social Security payment without reductions for "early retirement" or for working.  It has nothing to do with income tax, this is a common misconception that I will discuss a little later in this article.

Normal Retirement Age is determined by when you were born, and has changed since Social Security was started -- for people retiring today it is older than age 65.  It is subject to further review and change by Congress, but as of now here is a table showing normal retirement age based on birth year:

                      Birth Year                                    Normal Retirement Age
                      before 1938                                                65
                           1938                                            65 years 2 months
                           1939                                            65 years 4 months
                           1940                                            65 years 6 months
                           1941                                            65 years 8 months
                           1942                                            65 years 10 months
                     1943 to 1954                                               66
                           1955                                            66 years 2 months
                           1956                                            66 years 4 months
                           1957                                            66 years 6 months
                           1958                                            66 years 8 months
                           1959                                            66 years 10 months
                       after 1959                                                  67

You should receive a statement from the Social Security Administration each year about three months before your birthday that provides your earnings history and their estimate of your future Social Security payments based on that earnings history.  You can also get their estimate at any time by going online to:   I suggest that you check this at least once a year, both to make sure that you agree with the earnings history they show (and get their help to correct any errors) and so that you have a realistic idea of what to expect given changes in cost of living adjustments, your earnings, Social Security law, etc.
What Happens When You Collect Social Security "Early" And Continue Working
Your starting point for determining Social Security payments is your earnings history and normal retirment age, as just described this is used to compute what the Social Security Administration calls your "Primary Insurance Amount" (PIA).  If you start collecting before your normal retirement age, the amount you actually receive will be reduced from your PIA in two ways. 
  • Time reduction.  You can start collecting Social Security at age 62.  If your normal retirement age is 66, your monthly payment will be 25% less than your PIA if you do start collecting at age 62.  If your normal retirment age is 67, the reduction to age 62 is 30%.  For normal retirement ages between 66 and 67, the reduction percentage is prorated between 25% and 30%.  If you wait later than age 62, but start collecting before your normal retirement age, the reduction percentage is also prorated at 0.5 to 0.6% per month.  For example, if you retire 27 months before your normal retirement age, you can expect a monthly Social Security payment that is 15% below your PIA.
  • Work reduction.  There is an earnings limit that applies when you collect Social Security before your normal retirement age.  In 2011, this earnings limit is $14,160 (it is adjusted yearly for changes in the cost of living index).  If you are not going to reach your normal retirement age at any time in a given year, for each $2 you earn above the earnings limit, you lose $1 of your annual Social Security benefits. This reduction is taken after already lowering your benefit for the number of months you started collecting before normal retirement age.  In the year you reach normal retirement age, you can earn up to a higher limit in the months of that year prior to reaching normal retirement age.  In 2011, this limit is $37,680.  You lose $1 in benefits for each $3 that you earn above the limit in that year.  In all future years after reaching normal retirement age, there is no longer an earnings limit that affects how much social security you will receive.  As I mentioned earlier, some people confuse this with earning as much as you want without having to pay income tax on your social security. This is not true, which leads me to the next question I would like to address... 
How Is Income Tax On The Social Security I Receive Taxed?

The simple rule of thumb is to add half of your gross social security income to your other gross income.  If the sum is less than $25,000 for most taxpayers ($32,000 if you are married filing a joint return), you probably don't have to pay tax on your social security income.  To be safe, fill in the worksheet on page 16 of IRS Publication 915 (available at  This worksheet will tell you how much, if any, of your social security income is taxable.  The short answer is that if you earn more than $44,000, 85% of your social security income will be added to your other income and taxed at the resulting tax bracket.  If you need help with this worksheet, be sure to get it.

You will notice I said gross social security income.  What does that mean?  It usually not the amount you received, but rather is the amount before any Medicare premium or income tax was withheld.  Be sure to get the right number before proceeding -- it is not enough to simply add the monthly payments you received for the year.

I would welcome you to comment below on your experiences with deciding when to start collecting Social Security and the impact of whether you continued to work.  If you had it to do over again, would you make the same decision.  Why or why not?  Thank you for your participation and for sharing this blog with your friends.

Photo credit:  Wise Senior by Vera Kratochvil

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