A big reason experts advise waiting until at least full retirement age to claim Social Security: You get to skip the benefits earnings test, which hits early claimers who are still working. But there are actually two earnings tests – and the second test can help early retirees leaving work midyear avoid the trap.
The Social Security Administration always applies the annual earning test first. Based on that test, the agency temporarily withholds $1 of a worker’s benefits for every $2 earned over $18,240 in 2020. In a year the worker hits full retirement age, the test is more generous – the worker forfeits $1 in benefits for every $3 in 2020 earnings above $48,600.
In the month a worker hits full retirement age – poof! – the earnings test goes away. The worker can earn whatever he or she likes, and the monthly benefit amount will be adjusted upward to consider all benefits forfeited in the past.
But if you’re tripped up by the annual test, you still have a shot at your full benefit. The agency 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.
Taking the Monthly Test
Here’s how the monthly earnings test works: If you are under full retirement age for all of 2020, you are considered retired in any month you earn $1,520 or less. If you reach full retirement age in 2020, you are considered retired in any month you earn $4,050 or less.
Say a beneficiary turns 62 in June. He wants to start benefits in July after working through the end of June and making $80,000 in 2020. On an annual basis, he’d get no benefit. But in July through December, if he earns $1,520 or less each month, the monthly earnings test would open the door to full benefits.
“You have to be careful if you go up to $1,521 – then the agency would add the $80,000,” Blair says. In that case, you would lose a check for that month, but not for the other months when benefits are below the monthly threshold. “A sneaky five-Friday payday month might end up passing the monthly earnings amount,” he says.
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 $4,050 would apply if the monthly test is used in 2020. The earnings tests count only earned income from a job or self-employment; investment income, for example, and retirement-plan payouts are ignored.
If you work while claiming early benefits, call Social Security with your estimated earnings so you don’t get more benefits than you are due. “Eventually, earnings are posted to your record and they’ll see they overpaid,” Blair says. The agency will want the money back – and will withhold benefit checks until the overpayment is cleared.
Source: Kiplinger’s Retirement Report, February 2020