How Does Work Affect Your Social Security?

Here’s a quick riddle for you: What do you call a program you contribute to but may not fully give back to you? Stumped? Well, if the headline didn’t give it away, we’re talking about Social Security!

We always like to look at the positive, but the fact is, Social Security, the government program that replaces some of the income you lose when you retire or become disabled, is only funded through 2035.¹ If you’re currently working and haven’t reached retirement age yet, it’s likely that you’ll only receive about 79% of the benefits you paid into over your working career when you retire.² That is, unless the government makes some big changes. (We won’t hold our breath.)

So more people may choose to delay taking their Social Security benefits and continue working instead, or continue working but start collecting Social Security early. It can get confusing. Can you collect Social Security at 62 and still work? Can you work at all once you start taking Social Security? We’re going to dig into all of it! Before you decide on how you want to tap into your Social Security benefits, let’s take a look at how Social Security works and how continuing to work can affect that equation.

How Does Social Security Work?

The Social Security program does a few things. Not only does it make up a percentage of retired workers’ pre-retirement income, but it also aids the dependents of beneficiaries and the survivors of deceased workers. Plus, it supports disabled Americans. So, when you count it all up, Social Security is a huge program.

More than one in six Americans collect Social Security benefits. That’s over 64 million people!³ The program is funded by money from the government plus money from your paycheck in the form of Social Security tax. Both you and your employer contribute 6.2% each, or 12.4% total.⁴ (If you’re self-employed, the whole 12.4% is on you. But you can claim the “employer” portion as a tax deduction.)

While it might sting to bring home a smaller paycheck, the “good news” is that the money is automatically deducted. You never get to touch it in the first place. Those funds are used to pay current Social Security beneficiaries. Did you catch that? The money you’re contributing to Social Security now is not for you to use later. Remember that 79% stat above? That’s where this comes in. Right now, it takes 2.8 workers to cover the benefits of one Social Security beneficiary. Come 2035, when the number of total beneficiaries shoots up by more than 20 million, that 2.8 will drop down to 2.3.⁵ That means less workers to fund Social Security and more beneficiaries collecting it.

So for anyone eligible to collect Social Security now (more on that in a moment), a bigger concern might be if it’s better to take your Social Security benefits now and keep working, or keep working and wait until you reach full retirement age.

When Can You Start Taking Social Security?

Well, when you can start taking social security and when you should are two different questions, and the answers will differ from person to person. Full retirement age is considered to be age 67. But you can start claiming Social Security benefits as early as age 62 or as late as age 70.

Here’s what’s really important to keep in mind: Social Security is designed to replace some of the income you lose when you retire, not all of it. Social Security is just one part of a larger retirement plan, not the whole shebang.

Should I Retire and Keep Working?

You’ve got options when it comes to taking Social Security and continuing to work. Every person’s situation will be a little different, but here are the three main scenarios you might find yourself in.

Can You Collect Social Security at 62 and Still Work?

If you choose to take your Social Security benefits early, it means accepting permanently reduced benefits. How reduced are we talking? It could be a whopping 30%!⁶ Say you choose early retirement and start taking benefits at age 62. Because you retire five years early, you take a permanent reduced benefit and receive $700 per month. If you waited until age 67, it would be $1,000. Or if you waited until age 70, that number would actually go up to $1,240 per month.

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If you don’t need your Social Security benefits for day-to-day living expenses, you could claim your Social Security early and invest that money. (If you will need your Social Security benefits for living expenses, it’s best to wait and keep working.) You’ll make more money investing those funds in growth stock mutual funds than you will earning full Social Security benefits. Plus, when you die, that money will be a part of your estate. But remember, Social Security is like the dessert to your main course—it’s the added bonus, not your complete retirement plan. If you still have debt or are living without a fully funded emergency fund, this is not the route to go.

You could also decide to keep working while collecting Social Security, but be on the lookout for the Social Security income threshold. In 2021, that threshold is $18,960.⁷ That means if you start collecting Social Security early, continue to work, and make more than $18,960 per year, you’ll be looking at reduced benefits of $1 per every $2 you earn over $18,960. And while those benefits will be taxed, the reduced benefits will be returned to you once you reach full retirement age.

Waiting for Full Retirement Age and Working

Another option you have is to wait until the full retirement age of 67 when you can start to collect full benefits and continue to work. There’s one area to look out for here. In the year you actually turn 67, there’s still an income threshold. It’s quite a bit higher at $50,520, but if you go over it, you’ll see a reduction in benefits.⁸ For every $3 you earn over the threshold, Social Security will take $1. Once you are officially 67 though, you’re in the clear. There are no limits to how much you can earn and still receive full benefits. Plus, Social Security will re-run your numbers and increase your monthly benefit to make up for the earlier reduction.

Waiting Until Age 70 and Working

It’s simple: The longer you wait to take Social Security, the more benefits you’ll receive. Not only are you still bringing in income, but you’re also earning an extra 8% for each year you don’t take Social Security until age 70.⁹ So, if you continue to work up to age 70 and you’re debt-free with a fully funded emergency fund, then not only are you getting your full Social Security benefits (and then some), but you’re also hopefully funneling income from work into growth stock mutual funds. Now we’re talking!

A Better Plan for Your Retirement

Taking Social Security early isn’t necessarily a bad thing, especially if you have health issues or if you don’t rely on that money for everyday expenses and can invest it instead. Plus, if you can keep working during that time, you can really fill up your retirement tank. But in many cases, it’s going to make more sense to keep working and wait until 67, or even 70, to take your Social Security benefits. Before you take action though, make sure you talk to a SmartVestor Pro. They’re here to help you understand what your options are so you can build the retirement of your dreams!

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This article provides general guidelines about investing topics. Your situation may be unique. To discuss a plan for your situation, connect with a SmartVestor Pro. Ramsey Solutions is a paid, non-client promoter of participating Pros.