You can work while receiving Social Security retirement benefits.  And doing so can mean a higher benefit for you in the future.  While you are working though, your earnings will reduce the amount of your benefit until you reach your full retirement age at which point there is no penalty for earning a wage.  (See Adjustment for Reduction Factor in this same column.)

Until your full retirement age, Social Security deducts $1 for every $2 you earn over the annual limit ($15,120 in 2013) with one exception.

If everyone retired the first day of the new year in which they retired, there wouldn’t be any problems but some people retire when they reach a certain milestone (anniversary date of beginning work with a company for instance).  For those people, it’s likely that by the time they retire, they’ll have already received earnings in excess of the annual limit.  So for the first year of retirement, if you are under full retirement age for the entire year, Social Security considers you retired in any month that your earnings are $1,260 (2013 numbers)^[1] or less and you did not perform substantial services in self-employment (we’ll get to that in a minute).^[2]

So what this means is:

Robert Young retires from Boeing in July 2013 at the age of 64 (his full retirement age is 66).  By the date of his retirement on July 15, he’s already made $32,000, nearly twice as much as the Social Security annual limit.  But during his first year of Social Security benefits, Social Security will only count any monthly earnings Robert makes over $1,260.  So in August, Robert goes fishing, travels to see his new grandson and otherwise leads a retiree’s life.  He does the same in September.  Let’s assume he does not do any self-employment either.  By the end of September, Boeing calls Robert up and asks him to return to work for October, November and December to help them catch up on a backlog.  Social Security will pay Robert benefits for August and September because he made no money during that time (he could have made as much as $1,260) but in October, November and December, any Social Security check that Robert might make will depend upon how much he receives in payments from Boeing for those months of work rather than on the annual limit.

During the year of your full retirement age, Social Security deducts $1 for every $3 you earn over the annual limit, $40,080 in 2013, up to the month you reach your full retirement age with one exception.

During that first year you have reached full retirement age, Social Security considers you retired any month that your earnings are $3,340 or less and you did not perform substantial services in self-employment.

But supposing Robert waits until the year he turns full retirement age.  Robert turns 66 on October 15.  In that year, Robert can make as much as $40,080 (2013 numbers).  Any earnings after that, Social Security will deduct $1 for every $3 over $40,080.  Starting the month Robert turns 66, Robert no longer has a limit on how much he can earn.

But say that Robert puts off his date of retirement until the year he reaches full retirement age (66 years old).  Once again, any month that Robert doesn’t receive a paycheck (or isn’t self-employed); Social Security will consider him retired, no matter how much money he earned in the previous months employment.  But the new allowable earning record for the month is $3,340.  Then, in the month Robert turns 66, Robert no longer falls under any of those limits and he’s free to make however much he wants.

Now let’s go back and look at the self-employed requirements.

Social Security uses the phrase “substantial services in self-employment” because when you are self-employed, it’s hard to figure out your earnings.  What they look for instead is how many hours you dedicated to your self-employment over the month long period.  If you work under 15 hours, your time is not considered substantial and therefore doesn’t cost you any benefits.  On the other hand, if you work 45 hours or more per month, Social Security considers that substantial and won’t pay Social Security for that month.  In between those hours (15 to 45) Social Security makes the determination on whether or not your time has been substantial on an individual basis.

Let’s go back to what was said at the top of this column.  I wrote that working while collecting Social Security could potentially mean a higher benefit later on.  Here’s how that works.

Let’s look at our friend Robert Young again.  Things are tough at Boeing and since he’s expecting to get laid off anyway, Robert takes retirement at age 62.  He collects retirement for 12 months and during that 12 months, Boeing sells so many airplanes that they are looking to hire some of their experienced employees back.  So at age 63, Robert goes back to work and because he’s once again making too much money both monthly and annually, Social Security quits paying him his benefits altogether.  At age 66, Robert gets tired of the commute and permanently retires from Boeing.  When Robert retired at age 62, he received 75 percent of his benefits because he applied for benefits four years (48 months) early.  So Robert is worried that now that he has reached his full retirement age that he is stuck with only getting 75 percent of his benefit when in actuality he’s worked until the date he would have worked to in order to get his full benefit minus 12 months.  When he was receiving his Social Security check at age 62, his benefit was dinged 25 percent because he was getting his payment early.  When Robert attains full retirement age, Social Security will take a look at Robert’s benefits and make an adjustment.  That adjustment is called the Adjustment to the Reduction Factor (ARF).  In Robert’s case, his reduction should have been 6.67 percent rather than 25 percent.  So, Social Security will now pay Robert’s benefits at 93.33 percent of full retirement benefits.  The adjustment is automatic so Robert doesn’t need to do anything to get it.  For those people looking to figure out what their own ARF might be the formula is 5/9 of 1 percent for the first 36 months and then 5/12 of 1 percent for every month after.^[3]

A lot of people make a big deal out of their reduced benefits when they return to work but benefits are only temporarily reduced and that reduction can pay dividends later on.  Social Security does not count government or military benefits, investment earnings, interest, pensions, annuities, even rental income (unless it is a business activity) as income.^[4],[5]

Social Security benefits amount to hundred of thousands of dollars for Americans reaching retirement age.  For many people that benefit exceeds life insurance policies and savings as a mechanism for a comfortable retirement.  A decision about when to apply for benefits or what to do in specific cases really requires the expertise of an elder law attorney or a financial professional.