If you’re still
working and claim Social Security early, your benefits could be reduced, at
least temporarily.
by: Jackie Stewart, Rachel L. Sheedy, the Editors of Kiplinger's Retirement Report April
14, 2021
A
big reason experts advise waiting until at least full retirement age to claim Social Security: You get to
skip the Social Security benefits earnings test, which hits early
claimers who are still working. But there are actually two earnings
tests–an annual test and a monthly test–and the second one can help early
retirees leaving work midyear avoid the trap.
Here
are five things you need to know about the two Social Security earnings
tests.
1 of 5
Social Security Earnings Test for Annual
Income
The
Social Security Administration always applies the annual earnings test first.
Based on that test, the agency temporarily withholds $1 of a worker's
benefits for every $2 earned over $18,960 for 2021. In a year the
worker hits full retirement age, the test is more
generous–the worker forfeits $1 in benefits for every $3 in 2021 earnings above
$50,520.
In
the month a worker hits full retirement age, the annual earnings test goes
away. The worker can earn whatever he or she likes, and the monthly benefit
amount will be adjusted upward to take into account all benefits forfeited in
the past (more on recouping lost benefits below).
2 of 5
Social Security Monthly Earnings Test
If
you're tripped up by the annual test, you still have a shot at your full
benefit. The SSA will apply a monthly earnings test and set your
payments according to whichever test is better for you. "It helps
people who retire in the middle of the year not to be penalized," says Jim
Blair, a former Social Security district manager and a partner at Premier
Social Security Consulting, in Sharonville, Ohio.
The
monthly test can be used for only one year, usually the first year of
retirement. And it comes into play generally for midyear retirees who have
already earned more than the annual limit. Those who pass the monthly earnings
test can receive 100% of their benefits for any whole month the agency
considers them retired, regardless of total annual earnings.
3 of 5
How the Social Security Monthly Earnings Test
Works
Here's
how the Social Security monthly earnings test works: If you’re under full
retirement age for all of 2021, you’re considered retired in any month you earn
$1,580 or less. If you reach full retirement age in 2021, you’re considered
retired in any month you earn $4,210 or less.
Say
a new Social Security beneficiary will turn 62, the earliest age at which you
can claim Social Security but yet nowhere near his Social Security full
retirement age, in June. He wants to retire at the end of June after making
$100,000 in the first half of 2021, and he wants to start collecting Social
Security benefits in July.
Based
on the annual earnings test, he'd get no benefit. But in July through December,
if he earns $1,580 or less each month, the monthly earnings test would open the
door to full benefits. If he went over that amount in a month, then the SSA
uses the $100,000 he earned through June and he would not receive a Social
Security check for that month.
When
retiring in the year you reach full retirement age, the earnings test only
applies in the months prior to the month of your birthday. The higher threshold
of $4,210 would apply if the monthly test is used in 2021. The earnings
tests count only earned income from a job or self-employment; investment
income, for example, and retirement-plan payouts are ignored.
4 of 5
Recouping Benefits Lost to the Social Security
Earnings Tests
The
burning question when a person loses Social Security benefits to the earnings
test: When do I get my money back?
Unfortunately,
you won’t get all your temporarily forfeited benefits back in a lump sum at
full retirement age. Instead, your monthly benefit amount is adjusted
upward in the month you hit full retirement age to account for forfeited
benefits. The disappearing benefits essentially reduce the amount of
time you were considered to have claimed benefits early.
Say
you took benefits at age 62 instead of waiting to your full retirement age of
66, giving your benefits a haircut of 25%. If you forfeited 12 months’ worth of
benefits to the earnings test, at your full retirement age, you’ll be treated
as if you claimed benefits three years early, instead of four. Your lifetime
benefits reduction will get slashed from 25% to about 20%. That puts more money
in your check every month, and if you live long enough, you’ll recoup all the
benefits the earnings test temporarily took away.
Beware of Receiving More in Benefits Than You
Should
If
you work while claiming early benefits, call Social Security with your
estimated earnings so you don't get more benefits than you’re due. “Eventually,
earnings are posted to your record and they'll see they overpaid," Blair
says. The SSA will want the money back–and will withhold benefit checks until
the overpayment is cleared.
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