Beware The Social Security Earnings Test
Bringing in too much money in earned income can cost you if you continue to work after claiming Social Security benefits early. With what is commonly known as the Social Security earnings test for annual income, you will forfeit $1 in benefits for every $2 you make over the earnings limit, which in 2021 is $18,960. Once you are past full retirement age, the earnings test no longer applies, and you can make as much money as you want with no impact on benefits.
Any Social Security benefits forfeited to the earnings test are not lost forever. At your full retirement age, the Social Security Administration will recalculate your benefits to take into account benefits lost to the test. For example, if you claim benefits at 62 and over the next four years lose one full years worth of benefits to the earnings test, at a full retirement age of 66 your benefits will be recomputed — and increased — as if you had taken benefits three years early, instead of four. That basically means the lifetime reduction in benefits would be 20% rather than 25%.
Reasons You Should Claim Social Security Early
Learn why Social Security at 62 might not be a bad idea. Social Security 101
Your retirement planning likely includes getting income from the Social Security Administration, but when you start collecting Social Security benefits can have a big impact on your planning. The earliest you can collect is age 62, but youll get more money if you delay your benefits past your initial Social Security eligibility. If you wait until after your full retirement age to start collecting Social Security you can earn delayed retirement credits, which will increase your benefits even more.
You might think that waiting for bigger benefits is better, but thats not always the case. There is no definitive answer to when you should collect Social Security benefits, and taking them as soon as you hit the early retirement age of 62 might be the best financial move.
What Is The Effect Of Early Retirement
As mentioned, people who retire early face a smaller monthly benefit payment, and the amount is very clearly defined in the law. If you choose to retire before your FRA, your monthly benefit will be reduced by as much as 30%. The choice will affect your spouse as well. If your spouse chooses to retire before their FRA, the monthly benefit they could collect from your Social Security will be reduced by as much as 35% from the usual 50% amount a spouse would receive at FRA. The chart below shows payment details for someone retiring at age 62.
|Reduction in Benefit for Early Retirement|
|Year of Birth|
You must be 62 for the entire month to begin receiving Social Security payments in that month, so you will collect your first benefit in the month after your birthday.
Why Did The Full Retirement Age Change
Full retirement age, also called “normal retirement age,” was 65 for many years. In 1983, Congress passed a law to gradually raise the age because people are living longer and are generally healthier in older age.
The law raised the full retirement age beginning with people born in 1938 or later. The retirement age gradually increases by a few months for every birth year, until it reaches 67 for people born in 1960 and later.
To Wait Or Not To Wait
- Consider taking benefits earlier if
- Consider waiting to take benefits if
- Consider taking benefits earlier if You are no longer working and can’t make ends meet without your benefits.
- Consider waiting to take benefits if You are still working and make enough to impact the taxability of your benefits.
- Consider taking benefits earlier if You are in poor health and don’t expect the surviving member of the household to make it to average life expectancy.
- Consider waiting to take benefits if You are in good health and expect to exceed average life expectancy.
- Consider taking benefits earlier if You are the lower-earning spouse and your higher-earning spouse can wait to file for a higher benefit.
- Consider waiting to take benefits if You are the higher-earning spouse and want to be sure your surviving spouse receives the highest possible benefit.
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When To Apply If You’re Turning 70
Social Security won’t automatically start sending you checks once you turn 70, with one exception: If you took benefits after reaching full retirement age and then suspended your benefits to earn delayed credits of 8% per year, your benefits will automatically restart at 70.
Otherwise, you’ll need to file an application. The earliest you can file for Social Security is four months before you want your benefits to start.
Regardless of when you file, make sure you specify that you want your benefit to begin the month you turn 70 to get the maximum amount. Social Security pays a month behind, so expect your first payment to arrive the month after your 70th birthday. For example, if you were born on May 10, you’d request that your benefits start in May and receive the first payment in June.
But there is an exception if you were born on the 1st of the month. For those people, Social Security calculates benefits as if they were born the previous month. So if you were born May 1, you’d request that your benefits start in April. Your first payment would arrive in May.
When Can I Start Collecting Social Security
The minimum age to claim benefits is 62. If you are turning 62 and need the income from Social Security to support yourself, then you can start claiming your benefits now. However, if you have enough other income to keep you going until you are older, you may want to delay increasing the size of your monthly benefit.
Age : Wait And Accumulate Delayed Retirement Credits
At 70, you will get the maximum amount of benefits that you can get from Social Security. It does not make sense to delay your Social Security retirement age past 70 because your benefit amount will not increase. Waiting until 70 to begin your Social Security if you are married and are the higher earner results in a higher survivor benefit for your spouse.
How To Estimate Benefits By Birth Year
The SSA’s website offers a series of charts based on birth year that outline benefit amounts you and your spouse at many points before and at your FRA. As of June 2021, 1960 was the latest year available.
The earliest you can apply for Social Security benefits is three months before you turn the age at which you expect to retire and want to begin receiving benefits.
How Would Filing Early For Social Security Affect My Benefits
Its important to understand the cost of filing for Social Security early, before you reach your Full Retirement Age. If you do so, youll be penalized for earning any money above a certain amount: as of 2018, that amount was $17,040. If you earn anything above that amount, your benefit will be reduced by $1 for every $2 you earn above the limit.
Then, during the year where youre going to reach your FRA, that amount will change. For every $3 you earn above the $45,360 limit, theyll take away $1. But that only happens in the months before your birthday.
The first month after you reach your Full Retirement Age, your earnings will no longer reduce your benefits from Social Security anymore. Now you can have an outside job and earn as much money as you want without being penalized.
Social Security Benefits For Surviving Spouses
If your spouse was receiving Social Security benefits upon their death, you must report the death as soon as possible. You can call the Social Security Administration at 1-800-772-1213 between 7 a.m. and 7 p.m. on weekdays or visit your local Social Security office in person.
You are eligible for a one-time, lump-sum death benefit of $255 from Social Security if:
- You were receiving benefits on your spouses record at the time of death, or
- If you were living in the same household as your spouse at the time of death.
Any benefits received in the name of your spouse during the month of death or later must be returned to the Social Security Administration as soon as possible.
If your spouse worked long enough under Social Security, you may be eligible for Social Security benefits. You must be age 60 or older or disabled and 50 or older to qualify.
How much youll receive depends on the percentage of your spouses benefit as well as your age and the type of benefit youre eligible for.
You must apply for survivor benefits in person. You can call Social Security at 1-800-772-1213 to request an appointment.
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At What Age Are You No Longer Eligible To Apply For Social Security Disability
Havent applied for early retirement, but youre between 60 and 65 years old? Then youre in luck! You can apply for Social Security disability up until one year reaching before your full retirement age . Typically, that means you can still get approved for SSD benefits at 65, if you meet all other requirements. But once you reach your FRA, your SSD benefits automatically convert into regular Social Security retirement payments. That means any claimants age 66 and older cannot qualify for SSD, because they now qualify for regular Social Security.
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What Is The Best Age To Apply For Social Security
When it comes to planning your retirement, the decisions that you make regarding your Social Security application may be the most important numbers game you will ever play in your life. According to the Center for Retirement Research at Boston College, 48% of women and 42% of men who claimed Social Security retirement benefits in 2013 did so as soon as they were eligible at age 62. I believe that it is usually a mistake when single people apply for Social Security that early, but it is even worse for married couples who do so – especially in cases where the husband was the primary wage earner.
The Best Age To Apply For Social Security
The rational that I often hear from people who want to apply for Social Security at age 62 usually runs this way: Why not? Ive paid into the system for decades, and I might as well get something out of it before it goes bankrupt, right? It might feel like the best option at the time, but down the road you may find that it was the worst decision you ever made in your life.
The Social Security Break Even Point
The graph above shows that applying for Social Security at age 62 could be a very bad decision over… the long term.
Dead People Dont Have Financial Problems
There will always be attenuating circumstances that make everyones choice personal and unique. But, plan your Social Security decisions so that they make sense for both you and your spouse, for the short term and long term!
When Can You File For Social Security
The earliest when you can apply for Social Security benefits is at age 61 and nine months, and you can expect to receive your first payment four months laterthe month after your birthday. Typically, Social Security benefits are paid the month after they are due or must be specified. For example, the Social Security website states that an individual who wants their benefits to start in May will receive their first benefit check in June.
For example, if you turn 62 on Dec. 15, then your first full month of eligibility is January, and your payment for that month will arrive in February. If you have already reached age 62 and met all other eligibility criteria, then you may begin collecting benefits in the same month when you apply if you specify, although your first payment still would not arrive until the following month.
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The Second Best Choice
Single Social Security claimants who want to hold off until age 70, but find they cant quite wait any longer should select age 69 for the best trade off, according to Christopher Jones, chief investment officer at Edelman Financial Engines.
That sacrifice may be as little as a few thousand extra dollars in additional lifetime benefits in exchange for starting a year earlier, according to Jones.
If youre single, well tell you you should wait until 70, Jones said. It is generally preferable to do so.
“But its not quite as critical as it is going from 66 to 67, or 67 to 68.
In a low interest rate environment, it’s hard to beat the potential increases for every year you delay claiming your benefits, Jones said.
Thats a guaranteed real rate of return backed by the federal government, Jones said. You cant get real rates of return at 6% to 8% right now not even close in the marketplace.
How Will Working Affect Social Security Benefits
In a recent survey, 68% of current workers stated they plan to work for pay after retiring.1
And that possibility raises an interesting question: how will working affect Social Security benefits?
The answer to that question requires an understanding of three key concepts: full retirement age, the earnings test, and taxable benefits.
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What Is Full Retirement Age
The size of your monthly Social Security benefit depends on a few factors, including how much you earned over the years, the year you were born, and the age when you start claimingdown to the month.
Youll receive your full monthly benefit if you start claiming when you reach what Social Security considers your full retirement age , sometimes also referred to as normal retirement age. FRA was 65 when Social Security began, but it has been raised to 67 for anyone born in 1960 or later. To find your FRA, see the chart below.
|Finding Your Full Retirement Age|
Collecting Social Security Before Or After Your Full Retirement Age
If you begin collecting Social Security at age 62 and your full retirement age is 66, the check you receive will be about one-quarter less than the amount you would have received at full retirement age. If you are the sole breadwinner in your household, your spouse could be negatively affected as well. If you begin collecting before your full retirement age, the amount of money your spouse would receive after your death decreases.
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Benefit Amounts Vary Depending On Your Social Security Retirement Age
Your Social Security retirement age and the amount you receive varies depending on several factors. For example, the earliest age you can collect your Social Security retirement benefits is 62, but there is an exception for widows and widowers, who can begin benefits as early as 60. If you start collecting benefits early and continue to work, your benefits may be reduced.
Here’s how this works with the basics on Social Security claiming ages from 60 to 70.
An Example Of Taxed Benefits
Lets say you receive the maximum Social Security benefit for a worker retiring at FRA in 2021: $3,148 per month. Your spouse receives half as much, or $1,574 a month. Together, you receive $4,722 a month, or $56,664 per year. Half of that, or $28,332, counts toward your combined income for determining whether you have to pay tax on part of your Social Security benefits. Lets further assume that you dont have any nontaxable interest, wages, or other income except for your traditional individual retirement accounts required minimum distribution of $10,000 for the year.
Your combined income would be $38,332half of your Social Security income, plus your IRA distributionwhich would make up to 50% of your Social Security benefits taxable because youve exceeded the $32,000 threshold. Now, you may be thinking, 50% of $56,664 is $28,332, and Im in the 12% tax bracket, so the tax on my Social Security benefits will be $3,399.84.
Fortunately, the calculation takes other factors into account, and your tax would be a mere $225. You can read all about the taxation of Social Security benefits in the Internal Revenue Service Publication 915.
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