By Heather Schreiber, RICP
Do you plan to apply for Social Security and continue to work? Do not pass go before understanding the earnings limitation that applies to early filers.
The earnings limitation on Social Security claims is one that can put you in a jam, if you are unaware of the rule before you file for early retirement. If you plan to file for benefits prior to your full retirement age (FRA), which ranges from 66-67 depending on your year of birth, and continue to work, earnings above a certain threshold will cause a portion of your benefits to be withheld.
If you are under your FRA for the entire year and collect benefits in 2020, your earnings above $18,240 will cause $1 for every $2 to be withheld from your benefit.
Here is an example: Mary claimed benefits at age 62 when she retired last year and receives $1,500 per month. However, she was later offered a position part-time and expects to earn $24,000 in 2020. She will have $6,260 in excess income ($24,500 - $18,240). 50% of the excess income, or $3,130, will be withheld from Mary's benefit. So Mary should expect not to receive her monthly benefit until beginning in month 4 for the remainder of the year ($3,130/$1,500 = 2.09 rounded to 3 months of withheld benefits). Notice that Mary's monthly benefits are withheld until the excess is accounted for rather than prorating her monthly benefit.
In this example, we assumed Mary contacted the Social Security Administration (SSA) to report her anticipated earnings for 2020 so that they could make the adjustment proactively by withholding benefits for 3 months. Had Mary not reported her earnings, SSA would match up her 2020 earnings in the following year and would, instead, ask for the $3,130 back that she received but was not entitled to due to her excess earnings.
Tip: If you file for benefits prior to your FRA, it is a good idea to contact SSA if you expect your earnings to change to avoid receiving a request for the overpaid benefits to be paid back in a lump sum.
This is also important to understand and prepare for, particularly if the Social Security monthly benefit is used for fixed expenses.
The earnings threshold increases to $48,600 in the year you reach full retirement age up to the month prior to reaching your FRA. And excess income over this threshold will only reduce benefits by $1 for every $3.
Once you reach your normal retirement age, the earnings limitation no longer applies. It is also important to note that any benefits previously withheld will be restored at your FRA in the form of a higher monthly benefit to account for the previously withheld months of benefits.
Let’s go back to Mary: Over the course of three years, a total of 10 months of benefits were withheld from Mary due to her excess income. Once Mary reaches FRA, her monthly benefit will be re-calculated as if she had filed 10 months later than her initial claim date. So, if Mary filed initially at age 62, her monthly benefit would be recalculated at her full retirement age as if she filed at 62 and 10 months, producing a higher monthly benefit.
Here are some additional considerations when making an early filing claim:
1. Only income from wages, tips, salary, bonuses, and net income from self-employment counts.
2. Other sources of taxable income such as pension income, dividends, and IRA distributions do not count toward the earnings limitation.
3. Only the earnings of the claimant are considered, not that of a spouse.
4. Your earned income may fall under the earnings threshold but your earnings, combined with other sources of household income, could cause a portion of your benefits to be taxable.
5. If you need income on a predictable monthly basis and your earnings fall above the applicable threshold, be prepared to have monthly benefits withheld until the excess is accounted for as in Mary’s example.
Special Earnings Test in the First Year of Retirement
If you plan to retire mid-year and have already exceeded the earnings threshold, you may still be able to collect your full benefit due to the special rule that applies to early filers who retire mid-year.
Here is an example: John just retired at the age of 64. He earned $52,000 up to the date of his retirement, well over the $18,240 limit. Provided John’s earnings for the rest of the year do not exceed the monthly equivalent of the annual limit ($1,520), his prior earnings will be disregarded and he will be entitled to collect his monthly benefit for the remainder of the year. Therefore, should John decide to transition to part-time work, he may do so provided he earns less than $1,520 monthly for the rest of 2020. In 2021, the earnings test applies only on an annual basis.
Be an Informed Social Security Claimant
The adage that knowledge is power could not be truer when making the important decision on when to file for Social Security benefits. The earnings limit is just one example of an often overlooked rule that could impact the monthly income you receive. For more information on the effect work may have on your benefit, reach Social Security Administration’s publication on the topic here: https://www.ssa.gov/pubs/EN-05-10069.pdf
About the Author
Heather Schreiber, RICP®, president of HLS Retirement Consulting, is a nationally recognized keynote speaker and consultant on retirement-related topics including Social Security as an integral component in developing a holistic retirement income strategy. Heather is the author of Social Security Advisor, a monthly newsletter designed to educate the public on this critical income source, and has been quoted in Forbes, USA Today, and ThinkAdvisor.