Last week’s post discussed the fact that, with two exceptions, the choice of your Social Security start date is an irrevocable decision. The two exceptions allow you to suspend payment of your monthly retirement benefit in order to take advantage of Social Security’s annual 7% – 8% benefit increase between age 62 and 70 that’s available to individuals who haven’t yet begun receiving benefits.
Both of the benefit payment suspension exceptions require you to file an application with Social Security Administration in order to implement them, and, as such are voluntary. There’s another way to suspend payment of your benefits that’s automatic and doesn’t require you to complete a form.
Social Security has an earnings test that only applies to individuals who are younger than their full retirement age (“FRA”). FRA varies between age 65 and 67 and is determined by your year of birth. Once you reach your FRA, your benefit amount will be unaffected by the amount of your earnings.
There are actually two earnings tests:
- Under full retirement age
- The year an individual reaches full retirement age
Under Full Retirement Age
If (a) you’re less than your FRA and (b) you’re not in the year that you will reach your FRA, you can earn up to $15,120 a year without any reduction in your Social Security benefits. Once you exceed this amount, your benefits will be reduced by one dollar for every two dollars in earnings above this limit.
The Year an Individual Reaches Full Retirement Age
In the year than you reach your FRA, you can earn up to 1/12 of $40,080, or $3,340 a month, during each month preceding the month that you reach your FRA without any reduction in benefits. Once you exceed this amount, your benefits will be reduced by one dollar for every three dollars in earnings above this limit.
It’s common for individuals who may be affected by Social Security’s earnings test to use it to target the amount of earnings they will receive in order to avoid a reduction in benefits in a particular year. What many people fail to understand is that to the extent their benefits are reduced as a result of the earnings test, they aren’t lost, they’re simply suspended. Furthermore, there will be an increase in benefits to the extent that they were reduced once FRA is reached and the earnings test is no longer an issue.
My recommendation is don’t let the earnings test drive your decision regarding the amount of your earnings in a particular year for two reasons. First of all, you won’t lose Social Security benefits if your earnings exceed the threshold amount. Your benefits will simply be deferred. Second, the employment income that you’re foregoing may require you to tap into other sources of retirement income prematurely, resulting in a potential accelerated depletion of valuable retirement assets that wouldn’t have otherwise been necessary.