With more and more Americans working past the traditional retirement age of 65, it's important for financial advisers to be aware of how Social Security benefits may be affected by continued employment.
Jeffrey Davies, an adviser with Moors & Cabot Investments in Poland, Ohio, asked what would happen if a 62-year-old client began collecting reduced retirement benefits early and the following year accepted a job that paid him more than $100,000 per year. “Can this person suspend his Social Security benefits and reapply later?” Mr. Davies asked. “If so, will this person receive a higher benefit later?”
It depends on how long the client had been collecting benefits. Anyone can change their mind and withdraw their application for Social Security benefits within 12 months of first claiming. But they can only withdraw their application once, and they must repay all the benefits they have received, plus any benefits collected on their earnings records, such as by a spouse, minor dependent child or disabled adult child.
If the client missed the 12-month window, he cannot suspend his benefits. But he should still contact the Social Security Administration immediately to tell them he plans to return to work. The agency will ask him to estimate his earnings for the coming year and will withhold the appropriate amount of Social Security benefits to satisfy the earnings cap restrictions. With annual earnings of $100,000, the client would forfeit all of his Social Security benefits that year and if anyone was collecting benefits on his earnings record, their benefits would stop, too.
Earnings refers to wages from a job or net self-employment income. It does not include pensions, investment earnings, interest, annuities or capital gains. However, an employee's contribution to a retirement plan, such as a 401(k), does count towards the earning limit if the contribution amount is included in the employee's gross wages. In other words, you cannot reduce your earnings that are subject to the earnings limit by contributing to a 401(k).
If the client fails to tell Social Security that he is returning to work, the truth will eventually catch up with him. He will have to repay the excess benefits later once the earnings are reported on his income tax return.
Here is an example of how the earnings cap works. In 2016, he would lose $1 in benefits for every $2 earned over $15,720.
Let's say that you file for Social Security benefits at age 62 in January 2016 and your payment will be $1,500 per month ($18,000 for the year). During 2016, you plan to work and earn $40,000 ($24,280 above the $15,720 limit). SSA would withhold $12,140 of your Social Security benefits ($1 for every $2 you earn over the limit). To do this, SSA would withhold all benefit payments from January 2016 through September 2016. Beginning in October 2016, you would receive your $1,500 benefit and this amount would be paid to you each month for the remainder of the year. In 2017, SSA would pay you the additional $1,360 that was withheld in September 2016.
In the year he turns 66, a higher earnings cap applies. Workers who turn 66 in 2016 lose $1 in benefits for every $3 earned over $41,880 during the months before their 66th birthday. The earnings cap disappears at 66, so the client can earn any amount without reducing his Social Security benefits.
Any benefits lost to the earnings cap would be restored at full retirement age. Plus, if his recent years of earnings replaced some of his previous top 35 years of indexed earnings that Social Security uses to calculate his full retirement age benefit, also known as his “primary insurance amount” or PIA, it could increase his future retirement benefits.
There is also a special first year of retirement rule. Under this rule, you can get a full Social Security check for any whole month you're retired, regardless of your yearly earnings. This helps people who retire in midyear or later who have already earned more than the annual earnings limit.
In 2016, a person younger than full retirement age for the entire year is considered retired if monthly earnings are $1,310 or less ($15,720/12). For example, John Smith retires at age 62 on Oct. 30, 2016. He will earn $45,000 through October. He takes a part-time job beginning in November earning $500 per month. Although his earnings for the year substantially exceed the 2016 annual limit ($15,720), he will receive a Social Security payment for November and December. This is because his earnings in those months are $1,310 or less, the monthly limit for people younger than full retirement age. If Mr. Smith earns more than $1,310 in either November or December, he won't receive a benefit for that month. Beginning in 2017, only the annual limit will apply to him.
You can read all about the earnings restrictions
here.
Mary Beth Franklin is a contributing editor to InvestmentNews
and a certified financial planner.
