By the time people approach the start of Social Security, most have some sense of the trade-offs. Start later and you get a bigger check. Start early and you get more checks over your lifetime.
But also worth considering is how working in retirement can affect the size of your Social Security check. Poor planning can cut it in half due to something called the retirement earnings test.
“The problem is most folks don’t realize there is an income limit and they find out a year later that they are going to lose their Social Security check to the earnings limit,” says Lynn B. Thurgood, president of Oxford Wealth Advisors in Rio Rancho, New Mexico.
The Social Security system encourages participants to wait until their full retirement age to start benefits. That age depends on one’s date of birth but is usually between 66 and 67. Once you reach that age, you can receive your full benefit no matter how much you earn from work, but the payments may be reduced before that date.
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Not all income is created equal. Basically, only ordinary income counts in this calculation. SSA says that “other government benefits, investment earnings, interest, pensions, annuities, and capital gains,” do not count. For the self-employed who do not receive a W-2 form, net income counts, but not all those other things.
So would-be beneficiaries must decide whether working after starting their Social Security benefit is worth it, knowing that the net gain can be substantially trimmed by the reduced benefit.
Thurgood urges clients to look at it another way: Is it really worth it to start Social Security?
“Rather than reduce the Social Security payment due to work income, would it make sense to tap investments to fill the gap between expenses and work income, and to delay the start of Social Security until there’s no penalty or work ends,” she says. “Many times it does make sense to delay the Social Security income and use other assets for income.”
Not only does this eliminate the issue of reducing the benefit from work, it actually increases the benefit by delaying the start of Social Security. The benefit grows by about 8 percent for every year you hold off.
Since that increase is guaranteed, it beats what you’re likely to earn in other fixed-income investments like bonds or bank savings.
And once you reach 70, you can start the bigger benefit and give up nothing if you work, no matter how much you earn.
The benefit reduction process can be complicated.
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If you’re younger than full retirement age during all of 2017, Social Security will deduct $1 from benefits for each $2 earned above $16,920. If you reach full retirement age during 2017, the agency will deduct $1 from benefits for each $3 earned above $44,880 until the month you reach full retirement age.
People with substantial incomes can be hit pretty hard, but even modest earnings are penalized. A person short of full retirement age and eligible for an annual benefit of $13,200 ($1,100 a month) would see the benefit cut to $11,660 by earning $20,000 a year.
If that isn’t complicated enough, there’s more: The money trimmed from your check is not lost forever. Instead, it remains in the pot of cash you are entitled to over your life expectancy and is gradually doled out after you reach full retirement age, boosting your monthly benefit for the rest of your life. The longer you live, the more likely this will offset all that you lost at the start.
“The retirement earnings test could decrease your benefit temporarily,” says Kevin Michels, a planner with Medicus Wealth Planning in Draper, Utah. “However, any decrease in benefit is not lost forever and will be made up by larger future benefits.”
If it all seems pretty tricky, it is. That’s why experts urge boning up or talking to a financial advisor well before deciding whether to work after benefits start.
Among factors to consider: how one’s health affects life expectancy, returns on the retirement nest egg and tax rates. Also, should a spouse rely on his or her benefit or take a reduced spousal benefit, for the duration or to boost his or her own benefit by delaying the start.
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“The most common mistakes are centered around planning,” says Mischelle Copeland, first vice president for investments at Wells Fargo Advisors in Fort Worth. “It’s imperative that everyone have a plan. Besides not having a plan, other mistakes are not considering one’s longevity, how long one will need income in retirement as well as tax implications — especially if one is still working.”
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Investments Can Give You Social Security Options originally appeared on usnews.com
