Social Security pays you a guaranteed monthly income at retirement. The amount of your monthly payments depends on your total contributions while working. Waiting until your full retirement age or later keeps your payments at 100 percent of the amount SSA has calculated for you to receive.
The Social Security Administration also allows you to take early retirement at age 62. However, when you retire at 62, you automatically receive a lower monthly retirement payment. You’ll have a limit on your annual earned income until you reach your normal full retirement age.
When you earn more than your maximum, SSA reduces your monthly payments even more. The good news is SSA doesn’t count any of your unearned income, no matter what age you are when you start collecting your retirement payments.
Considering Earned Income
SSA collects a percentage of wages that you earn throughout your working life. Your employers deduct the amount due from your gross pay and send it to your SSA account. Your employers also pay an equal amount into your account each pay period. The Internal Revenue Service says that for 2020, the total deduction for workers is 6.2 percent with an employer match of 6.2 percent. Self-employed workers must pay the full 12.4 percent into Social Security.
SSA only counts these two types of income when you claim retirement benefits. When you are self-employed after retirement, you will continue to make contributions to Social Security from your earned income. If you have full- or part-time employment, your employer makes them for you. If you collect retirement and are self-employed, SSA still requires that you pay the proper amount quarterly.
Unearned Income Exclusions
SSA doesn’t count unearned income when it’s necessary to adjust your retirement benefit payments. Some, but not all, retiring workers might have unearned income that won’t affect their Social Security payments. Rental income from property that you own and company-paid pensions are two common unearned income categories.
Bankrate notes that alimony, unemployment compensation and interest are other types of income that you might receive that don’t require working. Similarly, stock dividends and royalty payments also fit the SSA’s unearned income exclusion regulations.
Full Retirement Age
During much of the 20th century, SSA’s full retirement age was 65. Now the SSA uses a rolling scale to calculate every worker’s full retirement age. Workers born between 1943 and 1954 won’t reach full retirement age until the year they are 66.
SSA adds approximately two months to the normal early retirement age of 62 for workers born each year after 1954. Using this formula, the full retirement age for workers born in 1960 is now 67 instead of 65.
Early Retirement Penalties
When you choose early retirement, SSA reduces your normal monthly benefit payment. This penalty starts at 25 percent at age 62 for workers whose full retirement begins at 66. For workers whose full retirement age is now 67, the benefit payment reduction is 30 percent monthly.
Although SSA doesn’t count your unearned income, any wages you get from work also reduce your monthly benefit payment when you take early retirement. The 2020 limit on your annual earned income is $18,420. When you exceed this amount, SSA reduces your retirement benefit by $1 for every $2 you earn. Currently, during the calendar year in which you reach full retirement age, your annual earned income limit becomes $48,600.
SSA reduces your monthly payments by $1 for every $3 above your maximum earnings until the month of your full retirement. Then your earned income no longer reduces your monthly retirement benefits.
Carol Luther has published feature articles in print magazines, ghostwritten blogs, and produced digital content since 2007. She has published personal finance and small business articles for the Houston Chronicle, Mahalo, the Nest, USA Today, Wahm, and Zacks. Carol has designed, implemented and managed multi-year, multimillion-dollar domestic and international projects services for higher education, nonprofits, and small to medium businesses for more than 20 years.