Timing your earnings in retirement to optimize your social security retirement benefit – Part 2

Bunch your earnings

If you believe that all of your retirement benefit in one year will be withheld due to excess earnings, you may be able to bunch your earnings for that year in order to avoid affecting your benefits the following year.

Example(s): Consider the following case:

Situation: Allen receives a monthly Social Security retirement benefit. When he is 63, he opens his own painting business and, by September, has already earned $30,000 more than the retirement earnings test exempt amount for that year. Since $1 of his retirement benefit will be withheld for every $2 he has in excess earnings, he knows that his entire annual benefit will be withheld. Since business is good, he also knows that next year his retirement benefit will probably be affected by excess earnings as well.

Question: In October of that year, Allen has the chance to earn over $8,000 by painting a business. However, the owner isn’t in a hurry to pay, and Allen thinks about waiting to collect his fee until January of the following year. Should he?

Solution: No, Allen should collect his fee right away. His entire retirement benefit is already going to be withheld due to excess earnings, so the $8,000 fee won’t affect his benefit at all because any remaining excess earnings won’t be carried forward to the next year. However, if Allen waits until the following year to collect his fee, that fee may affect his Social Security retirement benefit because net earnings from self-employment are considered earned (for retirement test purposes) in the year they’re received.

Caution: Bunching your earnings from self-employment may help you avoid having your Social Security benefit withheld, but you should consider the overall tax implications. For example, if your earnings in one year are high enough, you may be subject to the additional Medicare payroll tax and the Medicare investment income surtax, or even be pushed into a higher income tax bracket, among other things. Consult a tax professional for help with your individual tax situation.

Time the start of benefits

Special rules apply to excess earnings during the first year of retirement. You might benefit from electing to begin receiving retirement benefits during a year in which you expect your earnings to be particularly high. During the first year you receive retirement benefits, if your wages from an employer are more than the annual retirement earnings test exempt amount, your retirement benefit will be reduced by the lesser of: (1) the reduction in benefits that would occur if the annual test applied, or (2) the benefit you received in the month or months that you earned more than 1/12th of the annual retirement earnings test exempt amount.

Example(s): Consider the following case: Jeff retires on September 30, 2016 at age 62. Before he retires, he earns $50,000 during the year. In October, he begins working part-time and earns $1,000 per month for the last three months of the year. Even though his earnings for the year greatly exceed the 2016 annual retirement earnings test exempt amount of $15,720, Jeff still receives a full Social Security benefit for October, November, and December. This is because his earnings in those months do not exceed 1/12 of the annual earnings test exempt amount of $1,310 per month in 2016. However, beginning in 2017, the annual retirement earnings test amount will apply to him because he will be beyond his first year of retirement.

Jeff’s case illustrates that the effect of excess earnings on your Social Security retirement benefit can be lessened somewhat if you elect to start receiving retirement income in a year in which you expect to have high excess earnings.

Article courtesy of Forefield.Securities offered through NPB Financial Group, LLC. A Registered Investment Advisor/Broker-Dealer Member FINRA, MSRB, and SIPC