Of the approximately 2,700 rules that govern Social Security benefits, one of the most confusing involves the annual earnings test that limits how much certain people can earn from a job without losing some or all of their Social Security benefits.
The earnings limit applies to people who claim Social Security benefits before their full retirement age while continuing to work. In 2019, people who are under the full retirement age for the entire year temporarily lose $1 in benefits for every $2 earned over $17,640. The limit increases to $18,240 in 2020.
In the year individuals reach their full retirement age, which is 66 for anyone born from 1943 through 1954, there is a much higher earnings test.
Social Security beneficiaries who are turning 66 in 2019 can earn up to $46,920 during the months before their birthday. If their earnings exceed that limit, they would forfeit $1 in benefits for every $3 earned over that limit. The limit increases to $48,600 in 2020.
Once someone reaches their full retirement age, the earnings restrictions disappear, meaning they can earn as much money as they like without jeopardizing any of their Social Security benefits. At that point, Social Security automatically recalculates their benefit amount to adjust for any months that they lost benefits due to excess earnings, resulting in a higher monthly benefit in the future.
The retirement age is higher for people born after 1954. Beginning with 1955, two months are added for every birth year until the full retirement age reaches 67 for people born in 1960 and later.
Ken King, a financial adviser in West Newbury, Mass., asked me for help crafting a Social Security claiming strategy for some clients. The husband is 68 and retired but not yet collecting Social Security. The wife turned 65 this year and is still working.
Mr. King wondered whether the wife could claim Social Security in October to trigger a spousal benefit for her husband. But with an annual salary of about $60,000 — more than $42,000 over the earnings limit — she would lose more than $21,000 in Social Security benefits. All of her benefits — and any spousal benefits owed to her husband — would be withheld due to her excess earnings if she filed for Social Security so late in the year.
I told Mr. King that the wife should file for her Social Security benefits to begin in January (paid in February) to take advantage of the higher earnings limit that applies in the year she turns 66. Her birthday is in March.
Once she claims Social Security, her husband, who was born before the Jan. 1, 1954, cutoff date, could file a "restricted claim for spousal benefits" and collect half of his wife's full retirement age benefit amount while his own retirement benefit continued to grow by 8% per year up until age 70. At 70, he would switch to his maximum retirement benefit.
Some people who retire in midyear have already earned more than their yearly earnings limit. That is why there is a special rule that applies to earnings for one year, usually the first year in retirement.
An individual could receive a full Social Security check for any month in 2019 that they are considered retired, regardless of their annual earnings, if they earn $1,470 or less per month ($17,640/12) and did not perform "substantial services in self-employment." Or if someone turned 66 in 2019, earned $3,910 or less per month ($46,920/12) and did not perform substantial service in self-employment, they could receive full benefits.
Substantial services in self-employment means that you did not devote more than 45 hours a month to the business or between 15 and 45 hours to a business in a highly skilled profession.
Many people are surprised to learn that the earnings limit applies to both retirement benefits and survivor benefits.
Janet Critchley, a financial adviser and accountant in Madison, N.J., wrote to me about a widowed client who has been collecting survivor benefits while she continues to work, earning about $40,000 a year.
"In 2019, with the $17,640 earnings limit, our client had benefits withheld the first seven months of the year before receiving widow's benefits from August to December 2019," Ms. Critchley wrote. "She turns 66 in November of 2020 so she should receive full widow's benefits for all of 2020. "
"Will Social Security automatically continue her benefits in January 2020, or does she need to call to let them know she reaches full retirement age in November and therefore is subject to the higher earnings limit?" Ms. Critchley asked.
Social Security Administration spokesperson Dorothy Clark said there is no need to contact SSA. The client's benefit will automatically be subject to the higher earnings limit in the year she reaches full retirement age.