In fact, if you keep working into your 70s after you have started your benefits, you will likely find that your benefit amount increase by more than the Cost of Living Adjustment each year: this difference is the impact of replacing that lower income year with a higher income one.

That said, the formula used to calculate benefits is such that the impact of these substitutions is not especially substantial: especially given the amount of taxes you might pay on that incremental income. In fact, it could take decades if not centuries for most of us to “earn” back those incremental taxes paid late in our careers because we keep working.

However, for most of us it won’t make much difference if we leave the workforce earlier after several decades or so in the workforce. Why? The formula for benefits weights incremental earnings very little above a certain number of years of work.

Fuller answer: Whenever the Social Security Administration (SSA) provides a benefit projection, it assumes you will earn at your most recent earnings rate between now and when you start collecting your benefits. A worker who is 60 will be provided an estimate of the future benefit at age 62, Full Retirement Age (an age between 66 and 67 that depends on your birth year) and age 70: this estimate provides the income assumption being used which is based on the most recent earnings reported to the SSA by the IRS, usually about 2 years prior. So the age 70 estimate assumes the worker continues at this rate up to that age.

As our work history gets longer, leaving the paid workforce will have less and less effect on our future benefits. In fact, for most of us, once we reach our 50s approaching 60, our future benefits are mostly locked in and more years of contributing payroll taxes into the system are not likely to boost our benefits in a significant way. And if we consider the extra taxes we are paying (6.2% out of our paychecks and an additional 6.2% from our employer—or from us if we are self-employed), we might have to live many decades or even centuries before we would get this money back in extra benefits! Why wonder what the impact will be when we can go online and find out? If you expect your income to change quite a bit between now and when you start collecting, you can adjust this estimate to reflect earnings changes and SSA will provide a revised estimate.

We first go to the SSA website and look up the current projection of our benefits as described in the FAQ above. Once you arrive at the benefit estimate screen you will see a gray button below this estimate that says “Add a New Estimate”. Click on this button and you are offered the option to run another estimate with different assumptions for when you stop working for income and how much income you will have between now and then. Usually you will be surprised to learn how little this changes the benefit estimate. Keep in mind that just because you enter an age to stop working for income doesn’t mean you have to start collecting your Social Security benefits at that age.

The difference will add up to many tens of thousands of dollars or more, just living to the average life expectancy. Obviously this is of greater impact for women than for men, since on average a female will collect almost three more years of benefits than a male. While wait until 70 is likely to pay off for men, it is likely to pay off far more for women. However, the more important reason for waiting to age 70 isn’t that you will come out “considerably ahead” financially if you make it to age 86 or so. Rather, the payoff is in “longevity insurance”, in the case that we keep living longer, and longer and longer… That higher age 70 benefit provides a strong financial foundation no matter how long we may live.

In addition, please be aware that while waiting to age 70, at any time after Full Retirement Age (an age between 66 and 67 depending on your birth year) you can start your claim if your health changes for the worse. In fact, you can make a retroactive claim up to 6 months (so long as it doesn’t predate your Full Retirement Age): you will be paid what you would have been eligible to receive as of 6 months prior, receive a 6 month lump sum payment and continue receiving at that rate thereafter, adjusted for inflation each year.

For countries with an international direct deposit agreement with the U.S. (and that’s most countries, though not all), your benefits can be paid directly to a corresponding bank in that country. This is likely to provide the most favorable legal exchange rate you will find anywhere: Social Security directs the Federal Reserve to transfer the funds to your overseas account based on that day’s exchange rate without offset or fees. Contact Social Security in advance and they can inform you which banks currently can accept direct deposit in the countries in which you are interested in living. You are also free at any time to switch such deposits off and redirect them to another corresponding bank elsewhere or to your U.S. bank.

Many people choose to have their Social Security payments deposited with their bank in the U.S., and then transfer money to their local bank outside the U.S. as they need it. Others simply purchase currency at a local bank using their U.S. account via debit card, or use their debit or credit cards for local payments.

Unfortunately this depends on the amount of your Social Security benefits, so there is no single simple answer.  That said, typically the taxability starts for other income in the $10,000 to $15,000 range for a single filer and $5,000 to $10,000 higher for married filing jointly.

Here’s the especially pernicious part of this peculiar tax rule (and why it is often referred to as the Tax Torpedo): at some point for each additional dollar of other taxable income, $0.85 of a dollar of Social Security benefit is added into it. In other words, you incur $1.85 of taxable income for each dollar of other income. At maximum 85% of benefits can be taxable; 15% is always untaxed under current law.

A brief example: A joint filing couple receive $5,000 monthly of Social Security benefits, $60,000 per year (say $2,500 each, though the split doesn’t matter). They also have $12,000 of net property rental income and $13,000 of required distributions from deferred tax accounts (IRAs, 401k, SEP etc.) for a total of $25,000. About 25% of their benefits would be added to taxable income, resulting in just under $1,300 of federal income tax.

Same example except their other income totals $50,000 (double): 60% of benefits are added to taxable income and the tax is about $6,700. Put another way, the extra $25,000 in income results in about $5,400 of additional tax: that results in a tax rate just over 20% on that marginal income – even though they are actually only in the 12% tax bracket – talk about phantom income!

In fact, their benefits start to result in a tax for other income above around $18,000 and reach 85% taxability for income around $67,000. Think about that: for the additional $49,000 of income above $18,000, they incur additional taxable income of $51,000 (85% of their benefits)! Ouch!

(Note: It isn’t enough just to have taxable benefit income. The total taxable income has to exceed the standard deduction and the over 65 deduction for our joint filers.)

There is an opportunity to plan – ideally well before we turn 70 – to mitigate the Tax Torpedo by planning our “other income” whether from withdrawals from our deferred tax accounts or from other sources.

Under this old rule a person might be able to claim a spouse benefit at Full Retirement Age, then switch to their own work-based claim at any time up to age 70 (at which point it is maximized).

For instance, if you start at age 66 and 4 months, Full Retirement Age, you will receive an amount equal to the greater of your work-based benefit at that age, or 50% of your spouse’s Full Retirement Age benefit—assuming always that said spouse has started to collect their benefit; if they have not done so, then your benefit will be limited to your own work-based benefit, if any, and it will be increased only after the spouse starts to collect their own benefit.

This rule is slightly different if divorced after a marriage of at least ten years. Whenever you start your benefit, you will be eligible for a spouse benefit regardless of whether the ex-spouse has started a benefit or not, or whether they started a benefit before their Full Retirement Age. However, the ex-spouse must be at least 62 years old. (This also assumes you have been divorced at least two years at the time of filing and have not remarried.)

You should also be aware that you will be eligible for a survivor benefit on your ex-spouse’s account should the ex-spouse pre-decease you. While there are exceptions to this rule, the survivor receives the higher of the two benefits being collected at that time. If the deceased has not started a benefit, it will be the higher of their Full Retirement Age benefit, or the benefit they would have been qualified to receive as of the month of death. (This benefit will apply to you so long as you have not remarried before age 60.)

As a general rule, if you are in reasonably decent health I would strongly recommend you wait to claim your work benefit at age 70 (assuming that benefit is somewhat greater than the spouse benefit at age 66 and 4 months would be: otherwise, claim the spouse benefit at 66 and 4 months). You are likely to collect far more in cumulative benefits when claiming earlier.

By the way, you do not need to start your benefits just because you stop working. You can retire tomorrow and still wait as late as 70 to start your benefit.

It is important for you to be aware that when you reach your Full Retirement Age (referred to as FRA, an age between 66 and 67 depending on your birth year) your benefit will be moved off of the disability program accounts and over to the regular old age and survivor accounts.

The amount will not change since it is based on their projection of your FRA benefit estimate at the time you became disabled. However, at FRA, you have the right to suspend receipt of your benefit and it would grow at the rate of 8% per year (plus any inflation each year), then you could restart it at the maximum at age 70. (You could also restart it before then at the then benefit amount for the month you re-start).

How so? It is true that in the near-term cash flowing into the program under current regulations is reduced because so many are unemployed: far fewer paychecks mean no payroll taxes being withheld from them and paid into the system. This will shorten the fund balances, and in all likelihood move the date up a year or two when the Trust Fund is exhausted – sometime in the early 2030’s.

I am still not worried! Why?

First, congress will fix it – probably not until the last minute, but they will fix it. The popularity of the program across all generations and the ease of the fix (i.e., it requires gradual tweaks to the program, not massive tax hikes or benefit cuts) make this completely inevitable in my view.

Second, the Trust Fund itself is a bit of a red herring. It is simply government debt. The government takes on debt all the time that is not paid for. The 2018 tax cut was not paid for since the expected growth has not and will not materialize in anyone’s view, even before the pandemic. It just adds to the debt. The trillions being pumped into the economy in recent years to support the pandemic weakened economy are not paid for either: more debt. Similarly, the government can vote to take on more debt to fully fund Social Security. Not saying they should, just that they can.

Now, at some point the debt is likely to become inflationary. In fact, the Federal Reserve probably prefers a little inflation right now: deflation is their big fear. And as we know from the 1980’s, inflation can get nasty.

Here’s the thing though: our benefits are adjusted for inflation under law. So the purchasing power roughly keeps up, no matter the inflation, or lack thereof. Other financial instruments suffer. Most other pensions are not adjusted for inflation. Many investments – stocks and bonds – will suffer in constant dollars. Debt holders will suffer. Social Security beneficiaries will be relatively fine.

So I believe it is more important than ever to maximize the value of our benefit check by claiming later as a hedge against future inflation and meager to poor market returns.

That means for a single person waiting to 70 to file the maximum work-based; for married couples the high earner should always wait to 70 to maximize the survivor benefit—the other spouse may elect to claim a bit earlier if that makes the financial plan work much better.

However, if you marry a non-citizen not otherwise eligible for benefits, such spouse is not eligible for any benefit (spouse or survivor) unless you live together married in the U.S. (or certain U.S. territories) for at least 5 years. If you have a child with such a non-citizen, whether married or not, the child is eligible for a child benefit under the family benefit rule once you are collecting your own benefit. The child benefits at age 18, or slightly longer if the child is still in high school. The benefit is as much as 50% of your Full Retirement Age benefit amount, though it is reduced if your spouse (or other children) are eligible on your record. Look at the amount indicated for “Family Benefits” on your recent statement: this is the max you, a spouse and any other dependents can collect on your record.

See this link about heirs born overseas: https://travel.state.gov/content/travel/en/legal/travel-legal-considerations/us-citizenship/Acquisition-US-Citizenship-Child-Born-Abroad.html

Now, I said there is “little” one can do… If you and/or your spouse were to continue earning income on which you pay payroll taxes (for Social Security and Medicare), then your benefit amount would increase for any such year in which the amount of your earnings is greater than the top prior 35 years of reported earnings (after these are normalized to today’s values for inflation).

I would not generally recommend this unless you are working anyway and loving your work! Why? Because the amount of the increase from such earnings this late in your working history is generally rather small, especially compared to the amount of Social Security taxes you would pay on those additional earnings: you would probably never receive back in cumulative added benefits the amount of extra taxes you paid.

The exception to this observation would be for someone who had little work history, just barely qualified for a benefit because they had their 40 quarters paid in under the system. Such a worker might increase their benefit with excess earnings at a higher rate than the taxes. That’s because benefits are steeply progressive: those with a low and/or limited earnings history receive a higher percent of their working income in benefits while higher lifetime earners receive a smaller and smaller return on their extra taxes paid.

When SSA provides a benefit estimate at various ages, usually 62, Full Retirement Age and 70, they assume that you will continue to earn the same amount of money that you earned in the most recent year for which you filed a tax return: the IRS sends this info to SSA each year.

If you have less than 35 years paying into the system, any year recently or going forward in which you have decent earnings, you are probably replacing a zero in your earnings history and the impact on your eventual benefit is relatively greater than it would be for someone who has more than 35 years paying in, as many do who are working into their 60s – for them the impact of an extra year or two of getting a salary and paying into the system has relatively little impact on their eventual benefit: it goes up a little, but not enough probably to ever recoup the extra taxes paid in even a somewhat long lifetime!

Second, relatively high earnings will subject more and more of your Social Security benefits to income tax. If you expect your other non-benefit income to be considerably lower after age 70, then little or none of your benefits will be added into taxable income. Up to 85% of your benefits can be added into your taxable income basis for federal income tax purposes if other income runs too high. (Most states do not tax your benefits: you can check quickly on line to see if your state does.)

Generally speaking, to qualify for a benefit under the U.S. Social Security program the worker must have worked and contributed into the system for a minimum of ten years (not necessarily consecutive). Other countries have their own rules that are too numerous and varied to list.

The most important point is to understand why the allowed benefit amount will be less than the two benefit amounts taken separately. Social Security benefits – as is the case with most benefit programs around the world – are progressive: that means that lower income lifetime earners receive a higher portion of their pre-retirement pay as a benefit than higher earners. Someone who earned around minimum wage all their life would receive about 90% of that amount as a benefit. Someone who earned $100,000 a year might see a benefit equal to around 35% of their earnings. The result is that someone who works under two different pension systems could end up with what they call a “windfall” benefit because their benefit taps into the most progressive part of the curve under both.

I’m sure that is rather confusing(!), so let me try to give an illustration. Imagine two countries that have pension systems just like Social Security: same tax rates, same benefit scale, based on your top 35 years of earnings (adjusted for past inflation), etc.

Mary works 35 years in the U.S. solely and earns an average of $40,000 in current dollars. At her Full Retirement Age (67 for most people going forward) her benefit would be around $1,544 per month. Jane earned the identical $40,000 in current dollars over 35 years. However, she spent half of those years in the U.S. and half in the other country. Her U.S. benefit looks like she earned an average of $20,000 per year over 35 years (remember, she only worked 17.5 years in the U.S. at $40,000 year; spread out over 35 years that averages at $20,000): her benefit would be $1,060. Since she spent the other 17.5 years under an identical but separate system, they also calculate the benefit at $1,062. Total of the two benefits is $2,124, $580 greater than Mary, even though both paid the exact same amount of taxes on the same total wages. That’s the “windfall”.

The U.S. has treaties with other countries to adjust for this.

So how much is it? The exact amount varies by year and other factors. However, as a very general rule of thumb, the maximum reduction in your Social Security might be as high as $450 to $500; however, it would be no more than 50% of the amount of the foreign country benefit if that is less. In addition, the reduction can be even less depending on how many years you work under the U.S. Social Security system: the reduction is reduced 10% for each year over 20 years of work paying into the SSA system.

Finally, with regard to the question as to why the Social Security Administration (SSA) will eventually want to know what your other non-qualified pension amount would be: they will ask for this amount because based on the amount of the other pension, your Social Security benefit may be slightly reduced.

The amount changes each year and for 2021 the earnings limit is $18,960. For each $2 you earn above that amount, your benefit is reduced by $1; eventually, earn enough and your benefit goes away entirely. For the year in which you reach your FRA the limit goes up to $50,250 and the reduction is $1 for each $3 earned above that amount during any time prior to retirement.

You may be surprised to see me suggest that is a good thing! Why? I am a strong advocate for most people that they wait to claim their benefit later because most people will live long enough to collect far more in lifetime benefits that way: many tens of thousands of dollars more. So if you realize too late that you claimed too early, one way to ease the impact is to earn too much up to FRA: your reduced benefit will be increased proportionately for each month in which you received a reduced benefit or no benefit at all. Then at FRA you can suspend your benefit and let it grow at 8% per year plus inflation to age 70. That’s one way to fixing a mistaken early claim and reducing the long-term cost of it.

The best way is to go online and use SSA’s Estimator. You visit the link below and you provide some information that will identify you. They will access your Social Security earnings record and tell you what they estimate you will receive when you start collecting Social Security retirement benefits at various ages.

Here’s what to do:
a) Go to the official SSA Estimator link here:
https://www.ssa.gov/retire/estimator.html
b) Scroll down to and click on the blue “Estimate Your Retirement Benefits” button.
c) On the next page enter your name, other last name (if the one on your most recent
Social Security card is different than the last name you first entered), mother’s
maiden name, Social Security number, date of birth, and place of birth (select from a
drop-down list).
d) On the same page, review the “Terms of Service”; if these terms are acceptable to
you, then check the box that says “I agree to the Terms of Service” and click on the
blue button that says “Submit.”

In the next screen enter your earnings from last year in the box below “Last year’s earnings.” Now click the blue button that says “Next.” The next screen will provide the current estimate of your Full Retirement Age benefit. This is the first number presented in the table (unless you are already older than Full Retirement Age). (This screen also provides the estimate for your benefit at age 70, as well as for age 62, or your current age benefit amount if older than 62.) The whole process takes no more than a few minutes.