Does Working Past Age 70 Affect Your Social Security Benefits?

Dear Carrie,

I'm turning 70 and about to start collecting Social Security even though I'm still working and intend to keep working for a couple more years. Since I'm past full retirement age, will I continue to pay Social Security taxes? Also, will continuing to work affect my monthly benefit?

—A Reader

Dear Reader, 

First, congratulations on waiting until 70 to collect your Social Security benefits. By doing so, you maximized your monthly payout. That's a smart move for many folks!

But while Uncle Sam gives you a bonus for waiting to collect Social Security benefits, he doesn't give you a dispensation from paying Social Security taxes. As long as you have earned income (such as wages), you're required to pay Social Security taxes on up to the annual payroll limitation—$137,700 in 2020. So, yes, if you continue to work, you'll continue to pay into Social Security and other payroll taxes. Fortunately for you, since you're past your full retirement age (FRA), there's no benefit reduction based on income. You're entitled to full benefits no matter your income level. However, earned income may impact your benefit if you take Social Security before your FRA.

Whether or not your continued income has a positive effect on the amount of your monthly Social Security benefit depends on how much money you made in the past and how much you're making now. Here's why.

Social Security benefits are based on your 35 highest-earning years

The actual calculation to determine your Social Security monthly benefit is rather complex, but basically it's determined by your 35 highest-earning years, adjusted for inflation—up to the maximum taxable amount each year.

This ends up putting a cap on the maximum monthly benefit anyone can receive. The monthly max at FRA in 2020 is $3,011. Then, of course, if you wait to collect beyond your FRA, you earn delayed retirement credits, up to age 70, which will increase your monthly payment.

Continuing to work past your FRA could increase your benefits—depending

So will your monthly benefit go up if you continue to have earned income? That might be the case if your current salary is higher than one of your 35 highest-earning years to date. Here are a couple of examples.

First, let's say that you earned the maximum taxable income (or more) each of those 35 years. If so, you're already entitled to the maximum benefit. So while there may be a lot of other positive reasons for continuing to work, it won't get you a higher monthly Social Security payment.

But now let's say you earned less in the early part of your career and earnings in one or more of those years were lower than the maximum annual taxable income. If what you're earning now is higher than what you earned in one of your past 35 highest-earning years that have been indexed for wage inflation, your current higher income will replace one of the lower-earning years.

Since Social Security benefits are recalculated yearly, this added income could result in a higher monthly payment. But because there are 35 years of income included in the calculation to determine income over your remaining life expectancy from Social Security, you may not see much of a difference in your monthly payment. Fortunately, Social Security payments are adjusted for inflation, so every little increase can add up over time.

A couple of concerns—taxes and Medicare premiums

This all sounds like good news so far, but you should also be aware that continuing to work past 70 could cost you a bit more in taxes and Medicare premiums.

• Required Minimum Distributions (RMDs) increase your taxable income—If you have traditional retirement accounts, you must take an RMD at age 70½ or 72 depending on your birthday. This is considered ordinary income and could possibly push you into a higher tax bracket, especially as you continue to earn other taxable income. Not only would that possibly increase your income tax bill, you'd also most likely have to pay taxes on your Social Security benefits as I describe next.
• Increased income may make your Social Security benefits taxable—The percentage of your Social Security benefits subject to income tax will depend on your annual income. Currently, if you're a single filer and make $25,000 to $34,000, up to 50 percent of your benefits may be taxed; for income over $34,000, up to 85 percent of benefits may be taxed. Current limits for married filing jointly are $32,000 to $44,000 and over $44,000 respectively.
• Higher income might mean higher Medicare Part B and D premiums—Similarly, you may be charged more for Medicare premiums if you earn over a certain amount. For 2020 those thresholds are $87,000 for single filers and $174,000 for married filing jointly. However, if you still have healthcare coverage through an employer, you may be able to delay taking Part B and possibly Part D.

Check in with your accountant or financial advisor

I always think it's best to run the numbers by your accountant or other financial advisor. It's great to be able to continue to work for many reasons. In fact, the Bureau of Labor Statistics projects the biggest annual increase in the labor force through 2024 will be in the 65 to 75 age group. But make sure you know what continuing to work at this point in life means in terms of your overall financial situation.

Have a personal finance question? Email us at askcarrie@schwab.com. Carrie cannot respond to questions directly, but your topic may be considered for a future article. For Schwab account questions and general inquiries, contact Schwab.

Please note: This article may contain outdated information about RMDs and retirement accounts due to the SECURE Act 2.0, a law governing retirement savings (e.g., the age at which individuals must begin taking required minimum distributions (RMDs) from their retirement account will change from 72 to 73 beginning January 1, 2023). For more information about the SECURE Act 2.0, please read this article or speak with your financial consultant. (1222-2NLK)