Remember the days when you could actually retire when you reached a certain age? You could travel, spend time with your grandchildren and reconnect with your spouse after decades of hard work. With an increasing number of people unable to save enough to live out their later years playing golf and traveling, many are spending their retirement working another job – if they retire at all. Of course, some people just enjoy working and want to continue their careers (we're talking about you, Warren Buffet).
It’s All About the Credits
Qualifying for Social Security isn’t that difficult. Over the course of your working life you need 40 credits to be eligible for full benefits. Prior to 1978, that equaled 10 years of full-time work, but today credits are tied to wages.
“You needed at least $1,260 in earnings to receive a Social Security credit in 2016 [$1,300 in 2017]. The maximum number of credits you can earn in any given year is four,” says Mark Hebner, founder and president of Index Fund Advisors, Inc., in Irvine, Calif., and author of “Index Funds: The 12-Step Recovery Program for Active Investors.” You might get your yearly credit maximum after three months of work, while others might work all 12 months to get them. (For more, see Introduction to Social Security.)
Social Security calculates your benefit amount based on earnings received, whether you were self-employed or worked for a company. The more money you earned, the more you paid into Social Security, which means you have more to take out. The math is much more complicated than it sounds, but that’s basically how it works.
Full retirement age is between 65 and 67 years of age depending on the year you were born. Assuming your full retirement age is 67, you can begin taking benefits as early as age 62, though your amount will be 30% less than if you waited until you turned 67. If you don’t need your Social Security benefits at full retirement age, you can wait until age 70 to increase your payment. Once you reach age 70, you don’t get any credit for deferring payments. (For more, see 3 Benefits of Working Beyond Minimum Retirement Age.)
Now, About That Job
Let’s look at how a job may affect your base benefits. First, it depends on when you take them. Remember that although your full retirement age might be 67, you can start receiving benefits at 62, even if you're still working. But there's a catch: If you elect to receive benefits prior to full retirement age, you can only earn up to $16,920 (the limit in 2017, up from $15,720 in 2016). Once you earn more than the limit, Social Security deducts $1 from your benefits for every $2 you earn.
In the year you reach full retirement age, Social Security becomes far more forgiving. Once you earn more than $44,880, $1 is deducted for every $3 you earn but only from earnings prior to the month you reached full retirement age. Starting in the month you reach full retirement age, you can make as much money as possible without losing any benefit payments. (For more, see Working During Retirement: Making the Most of It.)
“When to claim benefits needs careful consideration, particularly if you retire before your full retirement age and plan to continue working,” says Peter J. Creedon, CFP®, ChFC, CLU, chief executive officer of Crystal Brook Advisors in New York, N.Y.
How Does Social Security Know?
All of these numbers seem quite specific, but how does the Social Security Administration have the time to track you and your earnings? The answer: It doesn’t. It’s your job to report your earnings. Matt Ahrens, associate financial advisor at Integrity Advisory Group says, “The biggest thing to remember if you are working is to notify the Social Security Administration if you're going to earn wages in excess of the earnings threshold. They will not be notified of your earnings until you file your taxes the following year, and if you were receiving excess benefits you can be fined, forced to pay back the excess or receive lower future benefits.”
Working Outside of the United States
If you are younger than full retirement age, Social Security withholds benefits for every month you work more than 45 hours. These rules can get complicated, so ask a Social Security representative for help.
The Bottom Line
If you paid into Social Security long enough to earn 40 credits and have reached your full retirement age, you can make as much money as you would like without being penalized. If you start receiving benefits earlier, do the calculations to decide whether working and receiving perhaps a reduced amount in early benefits makes financial sense. The situation is different for those receiving Social Security disability benefits, so contact a Social Security office for help.