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Ask Bob: Will Earned Income Reduce My Social Security Benefits?

A reader is ready to start his Social Security benefits but wants to be sure he doesn't cross a line and cause a reduction in his benefits. Adviser Vic Colella explains timing and taxes that could impact the reader's income.

Question

My full retirement age is 66 and 4 months. My birthdate is June 23. I thought that I read somewhere that you can start taking Social Security in the year you turn full retirement age, and as long as you don't make more than $50,000 by the time you reach full retirement age there is no penalty, i.e., if I started to take my retirement in January or February, as long as I stay around $5,000 per month, I could make it work. Or, is this totally off base?

Answer

Assuming you were born in 1956, that makes your full retirement age 66 and 4 months, says Vic Colella, a certified financial planner with Woodward Financial Advisors

"If your birthday is June 23 (happy belated!) that means that you can begin receiving your full benefit starting in November since Social Security pays benefits a month behind and you turn 66 and 4 months on October 23." 

“Benefit applications can take up to three months to process, so please do apply a few months in advance of your planned start date,” he advises, noting “also, since your birthday is from the 21st to the end of the month, you can expect to receive your payment on the 4th Wednesday of each month.”

“Regarding your question about taking your benefits earlier in the year without any reduction as long as you don’t make more than a certain amount of income, I suspect you might be thinking of something else,” says Colella. There is no income threshold that enables you to take benefits early without a reduction in their value. Your income only affects your benefits in the sense that your total income determines what portion of your Social Security income is taxed. Depending on your tax filing status and other income outside of Social Security (such as a pension or salary), you will have to pay income tax on 0%, 50% or 85% of your benefits. 

"Having said that," he adds, "you are certainly able to take your benefits before you’re fully 66 and 4 months, but your benefit would be permanently reduced by about 5% if you were to take your benefit in January or February (which would effectively translate to 65 and 7 - 8 months)." 

The Social Security Administration website (ssa.gov) has a great benefits planner page that lays out how much your full benefit would be reduced depending on the month you start benefits based upon your birth year.

Colella cautions the reader about taking benefits a couple of months early because doing so would permanently reduce the benefit for the rest of the reader’s life. “It’s worth mentioning that you also have the option to delay taking your benefits up to your age 70, resulting in a permanently larger monthly benefit in the same way that taking your benefits early reduces your benefits,” he says. 

Whether to take your benefits early, exactly at your full retirement age, or delaying your benefits is a personal decision. What makes the most sense for you will vary based upon your personal cash flow situation, family health history, and your views on Social Security in general.

Editor Hannah Sammut assisted with this report. 

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Email Robert.Powell@maven.io

Question

My full retirement age is 66 and 4 months. My birthdate is June 23. I thought that I read somewhere that you can start taking Social Security in the year you turn full retirement age, and as long as you don't make more than $50,000 by the time you reach full retirement age there is no penalty, i.e., if I started to take my retirement in January or February, as long as I stay around $5,000 per month, I could make it work. Or, is this totally off base?

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