For many American retirees, Social Security benefits are a critical source of income in retirement. The SSA calculates these benefits based on an individual’s highest 35 years of earnings, meaning that working longer can potentially increase your monthly benefit. However, what many retirees may not realize is that they can still work even after filing for their Social Security and that doing so might result in a permanent increase in benefits.
How Social Security benefits are calculated
Social Security benefits are calculated based on a formula using your Average Indexed Monthly Earnings (AIME) from your 35 best-earning years. Inflation rates for each year are factored into each year’s earnings to give the current economic environment. The SSA then uses the AIME in a progressive formula that determines your Primary Insurance Amount (PIA), which is what you get monthly if you claim at your full retirement age (FRA).
Taking benefits before FRA means that monthly payments will be reduced; delaying benefits can increase them substantially. But being able to work while receiving benefits adds another dimension to this calculation.
Working while receiving benefits
You can receive Social Security retirement benefits and continue working, but here are some key points to understand about how your earnings may affect your benefits:
- Earnings limit: If you are below FRA and earn over a certain amount ($22,320 in 2024), your benefits will be reduced. SSA will deduct $1 of your benefits for every $2 you earn above this amount.
- Transitioning to Full Retirement Age: In the year you reach FRA, the rules are a bit different. You can earn up to $59,520 and not forfeit any benefits, but for every $3 you earn above this amount before your birthday, $1 will be deducted from your benefits.
Once you have reached your birthday in the year you become FRA, you can earn any amount without forfeiting any of your Social Security checks.
Long-term benefits of continuing to work
Probably one of the biggest pluses to continuing to work while receiving Social Security benefits would have to be the possibility of increasing your AIME. If you earn more in later years than in any of your previous highest-earning years, those years with lower earnings can be replaced in the calculation. This can translate into a higher AIME and a higher benefit amount based on that new calculation.
For instance, you worked part-time after you had retired and made $50,000 in a year, higher than one of your previous lowest-earning years (let’s say $30,000), then that lower number gets replaced in the AIME calculation. This can make a big difference in your monthly benefit over time.
How earnings affect future benefits
The SSA automatically recalculates your benefit amount every year based on any new earnings reported after you start receiving benefits. If those earnings justify an increase due to replacing lower-earning years, the SSA will adjust your benefit retroactively to January of that year. That means not only will you get a higher monthly payment moving forward, but you will also receive back pay for any months prior when the new earnings were considered.
This recalculation process serves to reward those who are still working while collecting benefits from the system by making up for those contributions to the system.
Tax implications of working while collecting benefits
Though continuing to work can increase future Social Security benefits, a consideration must be made toward the tax implications. The earnings from work may increase the overall taxable income, which will have more of your Social Security benefits subject to federal income tax.
IRS has a formula to calculate how much of your Social Security income the government can tax, based on combined income, adjusted gross income plus nontaxable interest plus half of Social Security benefits.
- When combined income is below $25,000 for individuals or $32,000 for couples filing jointly, none of the benefits are taxed.
- Up to 50% may be taxed if combined income is between those thresholds and $34,000 for individuals or $44,000 for couples filing jointly.
- Above those amounts, up to 85% of benefits are taxable.
These are the factors that retirees should keep in mind when determining whether to continue working while receiving Social Security.
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