You may be counting on Social Security as a mainstay of income in your looming retirement. But when you take those benefits and how long you continue to work are both factors that can shrink that monthly check.
When you receive Social Security benefits before your full retirement age — 67 if you were born in 1960 or later — an earnings test can reduce or even eliminate the benefit you plan on. If you file for benefits early, at 62, you’ll get a lesser amount than if you waited until full retirement age, or FRA.
If your annual earned income exceeds $15,720 this year and you reach your FRA after 2015, Social Security will withhold $1 from your benefit for every $2 you’ve earned over this limit.
For example, if you fall into this category and earn $20,000 in 2015, your benefits will drop by $2,140, or half of the $4,280 that you earn over the limit. If you receive a benefit of $1,070 per month, Social Security withholds two months’ benefits.
It’s a big, unpleasant surprise if you got the full benefit for a time and the earnings test kicks in at the beginning of the following year.
After you reach FRA, you get an adjustment to your benefit for the withheld checks. From the above example, if you had two months’ benefits withheld during the three years before the year when you reach your FRA, you receive credit for the months of withheld benefits. At FRA, Social Security adjusts your benefit as if you filed six months later than you actually filed.
So if you originally filed at 62, your benefit adjusts to if you filed at 62 years and six months, translating into a 2.5 percent increase in your monthly benefit.
In a year that you reach FRA but before you actually turn 66, the earnings test eases up a lot and allows you to make $41,880. Plus the rule in this case becomes that Social Security withholds $1 from your benefits for every $3 over the limit. This higher exempt amount applies only to earnings that you made in months prior to the month when you reached your FRA.
These exempt amounts also generally go up annually with increases in the national average wage index. Only your income from employment or self-employment counts regarding the earnings tests.
So does all your money apply? No, and among your earnings that Social Security doesn’t count are:
■Deferred income for services you performed before becoming entitled to Social Security benefits;
■Court awards, including back pay from an employer;
■Payments for disability insurance;
■Retirement pay, such as from the military;
■Rental income from real estate if not considered self-employment (i.e., you did not materially participate in the production of the income);
■Interest and dividends on accounts and investments;
■Capital gains on stock and other investments;
■Workers’ compensation or unemployment benefits.
Other examples of income that Social Security doesn’t count in the earnings test: jury duty pay; reimbursed travel or moving expenses if you’re an employee; and royalties (only in the year you will reach FRA; otherwise your royalties count).
Jim Blankenship is a financial planner at Blankenship Financial Planning in New Berlin, Ill.