Does Working After Full Retirement Age Increase Social Security Benefits?

Does Working After Full Retirement Age Increase Social Security Benefits?

The full retirement age for Social Security is between 66 and 67, depending on when you were born, but many Americans work well past this point. Nearly a third of baby boomers (28%) even keep working after they formally retire, according to a Center for a Secure Retirement study.

Putting in this extra work not only helps to build your savings, but it can also boost the assistance you receive through Social Security. So how does working after full retirement age increase Social Security benefits?

How Are Social Security Payments Calculated?

Social Security determines how much you'll get per month based on two factors: the age at which you retire and your average earnings. The Social Security Administration (SSA) defines full retirement age as follows:

  • Age 66 for people born between 1943 and 1954.
  • Between ages 66 and 67 for people born between 1955 and 1959.
  • Age 67 for people born 1960 and later.

However, you get to pick when you want Social Security to begin making payments. You can start collecting when you're as young as 62 or delay past your full retirement age. If you start collecting at an earlier age, Social Security pays a reduced monthly benefit. If you wait to start payments, it pays you more.

Benefit 1: Delaying the Start of Payments

Let's look at an example to see how working after full retirement age increases Social Security benefits. In this case, your benefit at full retirement age would be $1,000 per month. If you take payments at 62, the SSA estimates the monthly payment would fall to $716 a month, nearly a third lower. On the other hand, if you can wait until 70 to start collecting, you would receive $1,266 per month.

That increase would remain for your entire life. If you're relying on Social Security as a key source of retirement income, it can be useful to delay payments as late as you can to get the most support possible from the government. Social Security won't give you any further bonus for delaying payments beyond age 70 though, so you should start collecting payments at this age even if you continue to work.

Benefit 2: Higher Average Earnings

Another way that working later can add to your benefits is by increasing your average career earnings, as Social Security sets your payment based on the 35 highest-earning years of your life.

Let's say you had some years where you only worked part-time, or you didn't earn a high salary early in your career. If you're earning more later in life, each extra year worked pushes up your average, which increases your benefits.

This applies even if you have started collecting Social Security. The government will see that you had another high-earning year and recalculate your benefits to increase your payments for the following year.

Possible Tax Implications

As you consider working in retirement, be aware that it could lead to some extra taxes on your benefits. According to the SSA, if your taxable income is more than $25,000 per year when you're single and $32,000 per year when you're married, you'll owe tax on part of your Social Security payments. Below these income limits, the payments would be completely tax-free. A higher income can also increase your premiums for Medicare.

Finally, additional income could push you into a higher tax bracket, which means you would owe more on withdrawals from your 401(k) and other retirement plans. As such, it's important to weigh any increased Social Security benefits against the potential taxes.

As you think about your options for retirement, consider speaking with a financial advisor. They can help you understand the rules for Social Security so you can find a work-life balance that maximizes your future income and prevents unnecessary taxes.

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