Timing your earnings in retirement to optimize your social security retirement benefit – Part 3

Strengths

You can avoid having part or all of your Social Security retirement benefit withheld

By postponing or bunching your earnings in retirement, you may be able to avoid earning more than the retirement earnings test exempt amount. By timing when you first begin receiving Social Security retirement benefits, you may be able to lessen the impact of earned income on those benefits. But see Tradeoffs.

Tradeoffs

The Social Security retirement benefit you keep may not be enough to offset the earnings from working that you lose

Example(s): Phillip (age 63) receives a Social Security retirement benefit of $1,000, or $12,000 per year. Phillip earns $28,720 in 2016, exceeding the earnings limit of $15,720 by $13,000, so his benefit is reduced by $1 for each $2 over the earnings limit, a total of $6,500 in benefits. Phillip’s income for 2016 is:

Social Security retirement benefit: $5,500

Employment earnings: $28,720

Total income: $34,220

Example(s): If Phillip decided to limit his earnings from his job to $15,720, his income in 2016 would have been:

Social Security retirement benefit: $12,000

Employment earnings: $15,720

Total income: $27,720

Example(s): Even though part of Phillip’s Social Security retirement benefit was withheld due to excess earnings, the money he earned from his job more than made up for that reduction.

Questions & Answers

How will earnings during the year you reach normal retirement age affect your retirement benefit?

Earnings after normal retirement age won’t affect your retirement benefit. But few people reach their normal retirement age on January 1. What if you have earnings during the year before you reach normal retirement age? The answer is that you are entitled to a special earnings exemption for the months that precede your birthday. For example, if you reach your normal retirement age on December 1, 2016, you will be entitled to earn up to $41,880 during the months that precede your birthday without reducing your benefit, and once you reach your birthday, none of your earnings will reduce your benefit. So, as long as your earnings from January through November of 2016 don’t exceed $41,880, you will receive all of your retirement benefit. However, if your earnings do exceed that amount $1 of your benefit will be withheld for every $3 of earnings that exceed the limit.