I've received several questions from financial advisers recently asking what will happen to their clients who claim Social Security this year after they have already earned more than the annual earnings limit. Will their benefits be reduced or even eliminated?
No, their Social Security benefits will not be affected if they stop working once they claim benefits, no matter how much they earned this year prior to retirement. But if your clients continue to earn income —whether full-time, part-time or on a consulting basis — after they retire, their benefits could be reduced or temporarily wiped out depending on their age.
Under a special first-year-in-retirement rule, beneficiaries can get a full Social Security check for any whole month they are retired, regardless of their yearly earnings. In 2018, a person younger than full retirement age for the entire year is considered retired if monthly earnings are $1,420 or less.
For example, assume your client claims Social Security when he turns 62 in October 2018. He earns $45,000 through October before retiring from his primary job. In November, he takes a part-time job and earns $500 per month.
Although his earnings for the year substantially exceed the 2018 annual limit of $17,040, he will receive a Social Security payment for November and December because his earnings for those months are less than $1,420 ($17,040/12). But if he earns more than $1,420 in either November or December, he won't receive a benefit. Beginning in 2019, only the annual limit will apply to him.
If your client turns 66 this year, there is a higher earnings limit and the reduction for excess earnings is less. He can earn up to $45,360 in the months prior to his 66th birthday and benefits are reduced by $1 for every $3 earned over the annual limit. Once someone reaches full retirement age, the earnings restrictions disappear, meaning they can earn any amount of money while collecting Social Security without reducing their benefits.
Only wages or net self-employment income counts toward earnings limits. The Social Security Administration doesn't count income from other government benefits, investment earnings, interest, or income from pension or retirement plans. However, SSA does count an employee's contributions to a retirement plan if it is included in an employee's gross earnings.
Consider this scenario. Let's say your clients are a married couple. The husband is the larger earner and plans to wait until age 70 to claim his maximum retirement benefit. The wife has a smaller benefit on her own earnings record and plans to continue working part-time.
She files for benefits in January 2018 at age 62. Her reduced benefits for claiming early is $600 per month. During 2018, she plans to work and earn $22,000. That's $4,960 above the $17,040 annual limit.
Social Security would withhold $2,480 of her benefits, which is half of her excess earnings based on the rule that she must forfeit $1 in benefits for every $2 earned over the 2018 earnings limit of $17,040.
To do that, SSA would withhold all of her benefits from January 2018 through May 2018 ($600 x 5 = $3,000). Beginning in June 2018, she would receive her $600 Social Security benefit and she would receive that same monthly amount for the remainder of the year. In 2019, SSA would pay her an additional $520 ($3,000 - $2,480) that was withheld in May 2018.
Here's an added claiming strategy tip. Once the wife claims her benefits, the husband could file a restricted claim for spousal benefits if he is 66 or older (and born before 1954), which would allow him to collect half of his wife's full retirement age amount even though she collected reduced retirement benefits early. Meanwhile, his own benefit would continue to accrue delayed retirement credits of 8% per year up to age 70.
But if her benefits are reduced because of excess earnings, so are his because he is collecting on her record. However, having two or more family members claiming benefits on one earnings record can speed up the process of satisfying the earnings test.
Let's assume the husband's spousal benefit, based on half of his wife's full retirement age amount, is $380 for a total monthly household benefit of $980. Based on her excess earnings of $2,480, SSA would withhold the first three months of combined benefits ($980 x 3 = $2,940) and begin paying the couple in April — two months sooner than if the wife was the only one collecting benefits.
Benefits lost to excess earnings are not gone forever. Once you reach full retirement age, your monthly benefit will increase to account for those months in which benefits were withheld.