Many older workers grapple with a common dilemma: they’ve reached the age when they’re eligible to apply for Social Security, yet even with the monthly benefit checks, leaving their jobs right away would leave them financially vulnerable. The question arises: Should they enroll in Social Security immediately or wait until retirement?
The answer isn’t straightforward and involves considering several factors. It is indeed possible to claim Social Security benefits while continuing to work, but it’s vital to comprehend the ramifications of this choice beforehand.
The consequences of claiming Social Security while employed vary depending on your age when you decide to do so. If you opt for benefits at or after your full retirement age (FRA), which falls between 66 and 67 for those not yet retired, depending on their birth year, the primary change may be in your tax obligations.
The federal government levies taxes on the Social Security benefits of seniors whose provisional income (their adjusted gross income (AGI) plus any nontaxable interest and half of their annual Social Security benefits) surpasses specific thresholds. If your job provides sufficient income, a portion of your Social Security payments could be subject to taxation. However, this could also apply to someone fully retired if they withdraw a substantial amount from their retirement accounts.
Younger workers who claim Social Security may also face benefit taxes and need to consider the earnings test, which is only relevant to claimants below their FRA. Put simply, if your annual income exceeds a certain threshold, the government will withhold a portion of your monthly benefits.
In 2024, if you are under your FRA for the entire year, you lose $1 for every $2 you earn over $21,240. People who turn in their FRA in the same year lose $1 for every $3 they earn over $56,520 if they go over this limit before their birthday. In 2024, these thresholds will increase to $22,320 and $59,520, respectively.
Fortunately, the withheld money isn’t lost forever. When you reach your full retirement age, the Social Security Administration will recalculate your benefits and add in any previously withheld amounts. Nevertheless, your monthly checks will not be as substantial as they would have been if you had waited until your FRA to apply for Social Security in the first place.
This is because the Social Security program reduces monthly payments to compensate for signing up earlier.
If you file early for social security benefits, you will be penalized for each month by 5/9 of 1% for a maximum of 36 months. If you file for Social Security benefits sooner than 36 months before your full retirement age, you get a reduction of 5/12 of 1% for every month you file earlier. On the other hand, if you choose to delay your benefits beyond your FRA, your monthly benefit will increase every month by 2/3 of 1% until you reach the maximum benefit at 70.
Deciding whether to claim Social Security while still working is a personal choice. If you don’t require the benefits immediately to cover your living expenses, you might prefer to delay claiming them and receive larger checks when you do. If you live well into your mid-80s or beyond, postponing your Social Security application should result in a more substantial lifetime benefit.
However, it’s entirely reasonable if you choose not to wait. Even if your checks do not provide enough income for full retirement, they might offer a boost that allows you to transition to part-time work or enhance your overall quality of life.
Furthermore, you should consider claiming benefits early if there are dependents, especially minors or disabled children or grandchildren you care for, who can claim Social Security based on your work record. These individuals can only apply after you’ve enrolled, and claiming their benefits, in addition to your own, could increase your household income.
If you’ve already reached 70, it’s advisable to sign up for Social Security promptly, even if you’re still working. After this age, your benefits won’t continue to grow, so delaying further would only mean missing out on money.
You might still encounter the earnings test or benefit taxes, depending on your other sources of income. However, these should not deter you from enjoying your Social Security benefits if you’re ready to enroll. Ensure that you comprehend the consequences of your decision so that you aren’t caught off guard come tax time.