Do you reach your full retirement age (FRA) in 2015? Still working? Thinking about starting Social Security in 2015?
What are some options to consider?
When to start Social Security benefits is always a popular topic during retirement seminars. In fact, there is no one overall best time that fits everyone. It is an individual decision.
Last week I posted annual retirement earnings test information for 2015. Noted there, earnings test amounts vary based on whether you are younger than full retirement age (FRA) for the entire calendar year, reach FRA during the year, or are at least FRA.
Today I am reviewing some options to consider for a person planning to work during 2015 and reaching full retirement age of 66 during 2015. FRA varies with year of birth. It is age 66 for those born from 1943 – 1954.
If you reach full retirement age in 2015, receive Social Security and are still working, Social Security deducts $1.00 in benefits for every $3.00 you earn above $41,880. Earnings for the retirement test include only your own gross wages and net-income from self-employment. Beginning with the month you reach FRA, earnings no longer reduce your benefits.
Assume our person, Happy Camper, expects to earn $41,000 in 2015, below the annual earnings test level for a person reaching full retirement age in 2015. Happy reaches FRA in May.
One option: Since Happy will earn below his retirement test level, he can start Social Security retirement effective with January 2015 and receive benefits for all months of the year even though he continues working. On the plus side, this gets him more monthly benefits. On the negative, this results in a retirement benefit permanently reduced by 4 months with a reduction of 2.22 percent of his full retirement age amount. He gets 97.78 percent of his FRA amount.
Note: To learn percentages for this example, I used the “compute the effect of early or late retirement” calculator, one of the SSA Retirement Planner tools. This calculator uses the terms “normal retirement age” for FRA and “primary insurance amount” for the FRA amount.
If Happy expects to earn more than the earnings test level of $41,880, this could still be a useful option for him. He would have to compare what he loses due to earnings (the $1.00 for every $3.00 noted above) to what he gains in payable benefits.
Another option: Since Happy Camper is still working, he could start Social Security effective with May, when he reaches full retirement age. The earnings test ends at FRA so Happy could continue working and receive unreduced Social Security retirement from then on. On the plus side, he does not have any reduction in benefits. On the negative, he gives up the benefits payable in the above option.
Yet another option: If Happy Camper plans to work for some months (or longer) past FRA and then retire, he can defer his Social Security until he actually retires. On the plus side, each month of delay gains a small increase from delayed retirement credits. On the negative, Happy again gives up payable benefits.
On a monthly basis, delayed retirement credits increase benefits by 2/3 of 1 percent of the full retirement age amount, or 8 percent annually, up to age 70. Use the previously mentioned “compute the effect of early or late retirement” calculator to compute this.
The retirement earnings test applies to the full calendar year with a special, one time, monthly earnings test available. The monthly test can apply when a person retires during the year, after already earning over applicable retirement earnings test amounts. It was not considered in the above options since Happy continued working through at least FRA.
These examples are only to discuss some options involving the earnings test. For simplicity, factors such as the potential for family benefits through Happy Camper’s record were not added in. Social Security benefits are just one thing to consider in your retirement planning. For examples, Happy Camper’s taxable income varies with these options and his life expectancy could influence his decision.
What is best for you?