Many workers in their 60s are eligible for Social Security retirement benefits, but aren’t ready to retire just yet. But claiming benefits while working has drawbacks, and older workers may want to delay taking benefits:
One good reason is to avoid the earnings test. If you claim Social Security before you reach full retirement age (66 for people born between 1943 and 1954), in 2018 your benefits will be reduced by $1 for every $2 you earn over $17,040. In the year you reach full retirement age, you’ll give up $1 in benefits for every $3 you earn over $45,360. In the month you reach full retirement age, the earnings test disappears. The test applies only to wages from a job or self-employment income; investment income, pension benefits and money withdrawn from your retirement savings aren’t counted.
The benefits you give up due to the earnings test aren’t lost forever. Once you reach full retirement age, the Social Security Administration will adjust your benefits so that you’ll recoup the amount that was withheld.
For example, suppose you retire at 62, file for benefits and later go back to work, forfeiting 12 months of payments by the time you turn 66. When Social Security recalculates your benefits, you’ll be treated as if you claimed them three years early instead of four. So instead of taking a 25 percent haircut in your payments, which is what happens if you claim at age 62, your benefits will be reduced by 20 percent.
Still, that 20 percent reduction will continue for as long as you claim Social Security. By waiting until you reach full retirement age, you’ll receive 100 percent of the benefits you’ve earned. And if you continue to delay claiming benefits — which you may be able to afford to do if you’re working — you’ll receive an 8 percent increase in your payout for every year you forgo taking benefits after full retirement age, until you turn 70.
Another compelling reason to delay Social Security: You may owe taxes on some of your benefits. Depending on your provisional income, up to 85 percent of your benefits are subject to federal taxes; 13 states tax your benefits, too.
Your provisional income is based on your modified adjusted gross income —which includes wages from a job — plus half of your Social Security benefits and all of your tax-exempt income. If your provisional income is less than $25,000 and you’re single (or less than $32,000 if you’re married and file a joint return), you won’t owe taxes on your benefits. If your provisional income is between $25,000 and $34,000 (or between $32,000 and $44,000 for married filers), up to 50 percent of your benefits may be taxable. If your provisional income is more than $34,000 if you’re single, or more than $44,000 if married filing jointly, up to 85 percent of your benefits may be taxable.
Sandra Block is a senior editor at Kiplinger’s Personal Finance magazine.