Reading Time: 3 minutes
I recently had coffee with a prospective client who had a financial advisor he “trusted” from his church—possibly a deacon. He had recently been laid off, was looking for new work, and was planning to take Social Security as soon as possible. He had been sold an annuity (or multiple annuities—I’m not entirely sure), but when we got to talking about Social Security, things got more fuzzy. I casually asked if he was aware of the earnings test—how earning too much in a part-time job could reduce his anticipated benefits.
Cue the deer-in-the-headlights look. Apparently, his advisor hadn’t mentioned this.
Unfortunately, I see this all the time. Too often, people are sold financial products they don’t fully understand, and their advisors aren’t experts in tax or Social Security. Then reality hits, and disappointment follows when they don’t receive the benefits they expected.
If you’re considering taking Social Security while still working, here’s what you need to know before you make a decision you may regret.
How Social Security is Taxed and Reduced if You’re Still Working
Social Security benefits aren’t as straightforward as many people assume. They can be taxed, reduced, or delayed based on your income, tax filing status, and age. It is best to have a professional guide you so you are aware of the nuances.
Here’s a brief summary of how it works:
The Earnings Test: How Working Affects Your Social Security Benefits
If you start taking Social Security before reaching Full Retirement Age (FRA) and are still working, you may be subject to the earnings test, which reduces your benefits based on how much you earn:
- Before FRA: In 2024, if you earn more than $22,320 annually ($1,860/month), Social Security will withhold $1 in benefits for every $2 you earn above this limit.
- The Year You Reach FRA: A higher earnings limit applies ($59,520 in 2024), and only $1 is withheld for every $3 earned above that threshold.
- After FRA: The earnings test disappears, and your benefits are no longer reduced, no matter how much you earn.
This is crucial because many people take benefits early without realizing their income could significantly reduce what they actually receive.
Social Security Taxes: Yes, It Can Be Taxed Too
Even if your benefits aren’t reduced by the earnings test, they may still be subject to federal income taxes based on your combined income (Adjusted Gross Income + Nontaxable Interest + 50% of Social Security Benefits). Here’s the breakdown:
- If your combined income is between $25,000–$34,000 (single) or $32,000–$44,000 (married filing jointly), up to 50% of your benefits may be taxable.
- If your combined income exceeds $34,000 (single) or $44,000 (married filing jointly), up to 85% of your benefits may be taxable.
Many retirees don’t anticipate this tax burden, especially if they have other income sources like part-time work, pensions, or investments.
Why Taking Social Security at 62 Isn’t Always a Slam Dunk
It’s tempting to start collecting Social Security at 62, but is it the right choice for you? Consider these factors:
- Reduced Benefits: Taking Social Security early results in a permanent reduction in your monthly benefit—up to 30% less than if you had waited until FRA.
- Longevity Considerations: If you live a long life, delaying benefits until 70 could mean substantially more in lifetime benefits.
- Spousal Implications: If you’re married, your claiming decision affects spousal and survivor benefits.
- Health & Income Needs: If you’re in poor health or need the income, taking benefits early might make sense. But if you’re still working and don’t need the funds, delaying could be the smarter move.
Social Security Decisions Are Complex—Get Expert Guidance
Social Security isn’t a simple “take it or leave it” decision. The right timing depends on your earnings, taxes, health, longevity, spousal situation, and financial plan. Unfortunately, many financial professionals don’t specialize in Social Security and taxes, leaving their clients unaware of critical pitfalls.
At Intelligent Investing, we specialize in helping clients navigate these tricky waters with comprehensive financial planning and expert Social Security strategies. If you’re approaching 62—or any key retirement milestone—let’s grab a complimentary coffee or call to discuss the best approach for your unique situation.
Get Started Today!
