Focus on finance: Drawing Social Security while working may not make sense

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Column by WM Steve Wright

By Steve Wright

Question: I know I can start collecting my Social Security early, at age 62, but can I still continue to work?

Answer: If you think you’ll take your Social Security benefits early but still continue working, think again. It just doesn’t make good financial sense in some cases, depending on how much you earn. The Social Security Administration creates disincentives for taking Social Security before your full retirement age. And here’s how they work it:

The Social Security Administration slowly has been increasing its full retirement age where you receive full retirement benefits based on your best 35 years of earnings, weighted by their wage index. Full retirement age now ranges from 66 to 67, depending on your birth date.

You can begin collecting earlier than your full retirement age, but your Social Security benefits will be reduced accordingly – and permanently. At the earliest starting age of 62 you receive only about 75 percent of your full benefits. That’s the first bad part of collecting early.

But if you’re still working while collecting, Social Security reduces benefits by $1 for every $2 of your working income above $15,120 for tax year 2013. During the year you turn your full retirement age until the month you reach full retirement age, Social Security reduces its benefits to you $1 for every $3 of working income above $40,080 for tax year 2013.

This means that if you’re making a good deal more than $15,120, you’re having some of your earned Social Security held back. So why take it early, get a permanent reduction in benefits and then not even get it all? That’s the second reason for not filing for early benefits.

Incidentally, you’ll not lose those withheld benefits for excess working income because they’re added to your full retirement benefits for later receipt.

The last disincentive is the normally tax-free Social Security benefits become subject to taxes as your income increases. Specifically, when your working income plus tax free bond income plus 50 percent of your Social Security income exceeds $25,000 if you’re single or $32,000 if you’re married, then 50 percent of the amount exceeding that threshold or 50 percent of your Social Security income – whichever is less – is taxed. At $34,000 (single) and $44,000 (married) threshold, up to 85 percent of your Social Security is taxed.

So creating sufficient working income to trigger taxation of whatever Social Security benefits again defeats most of whatever benefit you think you receive for taking early Social Security benefits.

With these three disincentives to collecting early Social Security benefits, you can see that collecting and working a lot just doesn’t make sense. If you need to collect early but are not going to earn that much – so you’ll not trigger benefits reduction or Social Security taxation — you’ll be OK.

Wm. Steve Wright is managing member of The Wright Legacy Group.