Considerations When Claiming Social Security While Working
Social Security is a vital source of income for many Americans in retirement, but what if you’re still working and considering claiming your benefits early? The decision to start receiving Social Security while continuing to work can have significant implications on your finances and long-term retirement plans. Understanding the key considerations before you take this step is crucial for making an informed decision.
1. The Impact on Benefits If You Claim Before Full Retirement Age (FRA)
The earliest you can begin claiming Social Security benefits is at age 62. However, if you choose to claim before your full retirement age (FRA)—which ranges from 66 to 67, depending on the year you were born—your monthly benefits will be reduced permanently. The reduction is about 6.67% for each year you claim before FRA, up to 36 months, and 5% for each year beyond that. For example, if your full retirement age is 66 and you start receiving benefits at 62, your monthly benefit could be reduced by about 25%. This reduction can be substantial, especially if you're relying on Social Security for a large portion of your retirement income.
2. The Earnings Test: How Working Affects Your Benefits
If you decide to claim Social Security while still working, you should be aware of the Social Security Earnings Test. If you're under your FRA and earn above a certain income threshold, your benefits will be reduced temporarily. For 2025, the earnings limit is $21,240 per year, meaning if you earn more than this amount, Social Security will withhold $1 for every $2 you earn above the limit. In the year you reach FRA, the limit increases to $56,520, and the reduction is $1 for every $3 you earn above the threshold. Once you reach FRA, there is no limit on how much you can earn while receiving Social Security benefits, and your benefits will no longer be reduced. While this may seem like a penalty, Social Security typically adjusts your benefits later to account for any reductions due to the earnings test. So, the withheld benefits aren’t gone forever—they may be added back once you reach FRA.
3. The Potential Long-Term Impact on Your Monthly Benefit
Claiming Social Security while working can also affect your future benefits. When you continue to work and pay Social Security taxes, your earnings will be recalculated into the formula used to determine your benefit amount. If your income in the years after claiming Social Security is higher than the years you’ve already worked, your monthly benefit could increase. However, this potential increase may be offset by the reduction from claiming early and the earnings test. It’s important to calculate whether the short-term benefit of receiving Social Security now outweighs the long-term reduction in your monthly payout. In many cases, waiting to claim until you reach FRA—or even age70—can result in higher monthly benefits due to delayed retirement credits, which increase your monthly benefit by 8% for each year you delay after FRA.
4. Tax Implications of Receiving Social Security While Working
Social Security benefits are subject to income taxes, depending on your total income. If you’re working while receiving benefits, your combined income may push you into a higher tax bracket, resulting in more of your benefits being taxable. The IRS uses a formula to determine the taxable portion of your Social Security benefits, based on your combined income, which includes your earnings from work and half of your Social Security benefits. If your combined income exceeds certain thresholds—$25,000 for individual filers and $32,000 for married couples—up to 85% of your Social Security benefits could be taxed. This is an important consideration, as the added tax burden could reduce the benefit of claiming Social Security early while working.
5. Evaluating Your Retirement Goals and Financial Needs
Finally, before deciding to claim Social Security while still working, consider your overall financial situation and retirement goals. If you enjoy your job and don’t need the extra income immediately, it may be worth delaying your Social Security benefits until you reach FRA or even age 70 to maximize your payout. Alternatively, if you’re financially ready to retire but still want to work part-time or earn extra income, claiming Social Security early might provide a financial cushion while you continue to work. Consider how your decision fits into your larger retirement plan. While Social Security can be an essential part of your retirement income, other factors—such as your savings, pensions, and overall health—should influence when you start claiming benefits.
Claiming Social Security while working can offer immediate financial relief, but it’s essential to weigh the long-term effects on your benefits, taxes, and retirement plans. By understanding how the earnings test works, how it affects your benefits, and the impact of early claiming, you can make an informed decision that aligns with your retirement goals. The right choice depends on your personal financial situation, but thoughtful planning is the key to ensuring that Social Security serves its intended purpose in your overall retirement strategy.