Early Social Security Benefits With Working A Lot Doesn't Make Sense

If you think you'll take your Social Security benefits early but still continue working a lot, you may want to consider if it makes good financial sense to do so. The Social Security Administration creates disincentives for taking Social Security before your full retirement age. Here's how they work it.

The Social Security Administration has slowly been increasing its full retirement age (FRA) where you receive your 'full' retirement benefits based on your best 35 years of earnings (weighted by their wage index). FRA now ranges from 66 to 67 depending on your birth date.

If you can begin collecting earlier than your FRA your Social Security benefits will be reduced accordingly - and permanently! At the earliest starting age of 62 you get only about 70% of your FRA benefits. That's the first bad part of collecting early.

But if you're still working while collecting before your FRA, Social Security (refer to table) reduces its benefits you get by $1 for every $2 of your working income above $14,160 per year. During the year that you turn your FRA, up until the month you turn your FRA, Social Security reduces its benefits to you $1 for every $3 of working income above $37,680 per year.

This means that if you're making a good deal more than $14,160 you're having some of your earned Social Security benefits held back. So why take it early, get a permanent reduction in your benefits, and then not even get it all? That's the second reason for not filing for early benefits.

Incidentally, you'll not lose those withheld benefits for excess working income since they're added to your FRA benefits for later receipt. That's a plus anyway.

The last disincentive is that the normally tax-free Social Security benefits become subject to taxes as your income increases. Specifically, when your working income plus tax free bond income plus 50% of your Social Security income exceeds $25,000 (if you're single) or $32,000 (if you're married), then 50% of the amount exceeding that threshold or 50% of your Social Security income - whichever is less - is taxed. At $34,000 (single) and $44,000 (married) threshold, up to 85% of your Social Security is taxed.

So creating sufficient working income to trigger taxation of whatever Social Security benefits again defeats most of whatever benefit you think you get for taking early Social Security benefits.

With these three disincentives to collecting early Social Security benefits, you can see that collecting and working a lot just doesn't make sense. If you need to collect early but are not going to earn that much - so you'll not trigger benefits reduction or Social Security taxation - then you'll be OK.