Part of Social Security’s “earnings test” is fairly straight forward. If you claim Social Security benefits prior to your full retirement age (FRA), and then return to work, you may find your monthly benefits temporarily reduced if you earn over a set amount.
But what’s a little less clear is how you may eventually get some of that money back, in the form of a higher monthly benefit, when you do reach FRA.
Social Security recipients are allowed to work while claiming benefits. But if you are under FRA, you are only allowed to make an annual set amount ($16,920 in 2017, for most) before the agency starts clawing some of that back at a rate of $1 for every $2 earned (earnings don’t include income from pensions, dividends, interest, capital gains, or other government benefits).
There’s a different formula and earnings limit for workers who earned money during the year in which they reach FRA, we’ll get to it later.
Maybe the first question is to ask why you plan on claiming benefits early if you plan to keep working? Think about that long and hard, and remember that your monthly benefit will be reduced for every month you receive benefits before FRA. That doesn’t mean you can’t or shouldn’t claim early, but it should encourage you to make a purposeful, mindful decision knowing all the facts.
OK, assuming you decided to claim before FRA and you decide to keep working, here’s the drill.
Social Security’s example assumes a worker filed for benefits at 62, the earliest possible age, but continued working. In the example, the hypothetical benefit amount should be $600 a month ($7,200 a year) but the recipient earned $22,000 during the year, which is $5,080 more than today’s $16,920 threshold.
In response, the Social Security Administration will take back $1 for every $2 over the threshold, $2,540 in the example ($5,080 ÷ 2 = $2,540).
The process starts when the agency asks recipients how much they expect to earn each year. The agency can also calculate or adjust the amount through reported W-2 tax forms, those forms you get from employers after a year of work that help you report how much you made and must pay in taxes.
Once Social Security has an estimate on how much the worker will make, it starts withholding monthly checks until it figures it has recaptured the correct amount. Any excess is returned in the first check of the next year.
The good part
Here’s the part that’s surprisingly fair. When the worker reaches FRA, the agency looks back. If it sees some checks were withheld because of excess earnings, the agency recalculates the claiming date, adding a month to the claiming date for each month’s worth of withheld benefits. And that can mean a higher monthly benefit check going forward.
Social Security’s example continued
Social Security’s example goes on, ”Let’s say you claim retirement benefits upon turning 62 in 2017, and your payment is $964 per month. Then, you return to work and have 12 months of benefits withheld. We would recalculate your benefit at your full retirement age of 66 and 2 months and pay you $1,029 per month (in today’s dollars). Or, maybe you earn so much between the ages of 62 and 66 and 2 months that all benefits in those years are withheld. In that case, we would pay you $1,300 a month starting at age 66 and 2 months.”
In other words: take two steps forward, get dragged back one, and then get pushed ahead later. It’s that simple.
After reaching FRA, Social Security recipients can earn as much as they want without penalty.
And (here’s the part about the year of your FRA) because the agency understands workers may earn a substantial part of their salary during the year they reach full FRA (say someone who reaches an FRA of 66 in October and then retires) the agency allows workers to earn up to $44,880 without penalty in the year they reach FRA, and for that one year, the clawback is reduced to $1 for every $3 earned.
Things to Consider:
• Knowing you’ll give up some Social Security benefits if you work before full retirement age, maybe rethink filing for benefits if you intend to keep working.
• Plan ahead for any reductions in benefits while working.
• Ask your financial professional to help you decide what age is best for you to start claiming those hard earned Social Security benefits. Everybody has different needs and wants.
Every situation is different. Consult with a qualified professional for answers to your questions based on your situation.