Dear Rusty: I’m just trying to figure out how to determine whether to retire at 65 or 67 and, if I retire, approximately how much could I make outside of my Social Security without being overly taxed. Signed: Thinking About Retiring
Dear Thinking: Deciding when to retire is serious business, because it affects your future and what your retirement income will be going forward. Thus, it’s good you are taking the time to fully understand your options, and we’re happy to assist you with that. Here are some things which should help you decide whether to retire at 65 or 67.
Social Security benefits are subject to income tax (by the IRS) if your combined income from all sources (which includes your Adjusted Gross Income on your tax return, plus half of the SS benefits you received during the tax year) exceeds certain thresholds for your income tax filing status. If you file your income tax as “married/jointly” and your combined income from all sources is more than $32,000, then 50 percent of your received SS benefits are subject to income tax (at your normal IRS tax rate). But if your combined income as a married couple is more than $44,000, then 85 percent of the SS benefits you received during the tax year becomes part of your taxable income. FYI, the taxation thresholds are lower for those who file taxes as an individual ($25,000 and $34,000 respectively).
Born in 1960 or later, your full retirement age (FRA) for Social Security’s purposes is 67. If you claim SS benefits before your FRA, not only will your monthly amount be permanently reduced but you’ll also be subject to Social Security’s “earnings test” which limits how much you can earn before they take away some of your benefits. The earnings limit changes annually, but for 2024 it is $22,320 (future year’s limits will be a bit higher each year). If your work earnings exceed the annual limit, Social Security will take away $1 in benefits for every $2 you are over the limit. They take away by withholding future benefits for as many months as necessary for them to recover what you owe for exceeding the annual limit. FYI, the limit goes up during the year you attain FRA, and the earnings test no longer applies after you reach your full retirement age.
If you claim SS before your FRA, your monthly amount will be permanently reduced. If you claim at age 65, you will get about 87 percent of the amount you would get by waiting until age 67 to claim. If you claim at age 66, your monthly amount would be about 93 percent of your FRA entitlement and, by claiming at 67 you’ll get 100 percent of the benefit you’ve earned from a lifetime of working. The reductions for early claiming are permanent reductions, except for the annual cost of living adjustments (COLA). Note that you can also delay longer than your FRA to get an even larger benefit amount (you can delay up to age 70 when your maximum benefit is reached). Just remember, the earnings test (as described above) will apply if you claim SS before your FRA and you are still working.
If your plan is to continue to work full time, be aware that if you claim early SS and significantly exceed the annual earnings limit, you may even be temporarily ineligible to collect SS benefits. If your work income is high enough that the penalty for exceeding the earnings limit is more than SS can recover through withheld benefits in one year, they will tell you that you’re unable to collect benefits at this time (until you either earn less or reach your FRA).
So, deciding whether to claim Social Security at 65 or 67 is your personal choice and, hopefully, the above provides the information you need to make an informed decision.
The information presented in this article is intended for general information purposes only. The opinions and interpretations expressed in this article are the viewpoints of the Association of Mature American Citizens Foundation’s Social Security Advisory staff. To submit a question, contact the Foundation at info@amacfoundation.org.
