I write a column similar to this one about this time every year. But I don’t mind plagiarizing myself because it contains a very important message for people planning to retire in 2015.
January is a critical month for the hundreds of thousands of potential Social Security beneficiaries who are reaching 66 (their so-called full retirement age) in 2015. The important message: Most of them should at least consider the possibility of filing for their benefits this month, even though they may not be reaching their retirement age until later in the year. But please note: This procedure should not be employed by folks planning on using one of the Social Security maximizing strategies I’ve discussed so often in this column, like file and suspend or file and restrict, because those provisions generally require you to wait until age 66 before filing for benefits.
The reason for this early filing timeframe for everyone else has to do with some quirky and complicated features of Social Security’s earnings penalty provisions. Those provisions generally keep seniors who are still working off of Social Security’s rolls until they reach that magic full retirement age.
The law essentially says if you are over 62 but under your full retirement age and are still working full time, you are not eligible for Social Security. Specifically, the rules require that the SSA deduct $1 from any retirement benefits you might be due for every $2 you earn over $15,720 in 2015.
However, the rules say that once you reach your full retirement age, you are due full Social Security benefits even if you are still working and no matter how much money you are making.
Let’s follow an example. Let’s say Ed was born in July 1949, which means he’ll reach his full retirement age of 66 in July 2015. And let’s further say Ed generally makes about $80,000 per year, and he plans to continue working indefinitely. Based on the earnings penalty rules I briefly outlined above, Ed figures he must wait until July (his full retirement age) to begin collecting his Social Security benefits. As I said, at that magical point the earnings penalty rules no longer apply and he can get his Social Security. And prior to that, he’s making way more than the $15,720 income threshold.
But here is why Ed should check into applying for Social Security in January. Congress set up a more lenient earnings threshold for the year you reach your full retirement age. Specifically, it says you can earn up to $41,880 between January and the month you reach your full retirement age and still get Social Security benefits. And even if you earn more than $41,880, you lose only $1 from your benefits for every $3 you exceed that threshold.
Ed is going to make $40,000 between January and June (i.e., before he reaches the magic age of 66). And that’s just under the $41,880 threshold for 2015, which means Ed is due benefits beginning in January. He does NOT have to wait until July to apply for his Social Security checks.
There is a bit of a catch. By starting his benefits in January, Ed will be accepting a slightly reduced amount. (Benefits are reduced roughly one-half of one percent for each month they are taken before full retirement age.)
If Ed’s Social Security benefit at full retirement age is $2,200 per month, let’s look at his options.
Ed’s first option is to wait until July (his full retirement age) to start his Social Security benefits. He’ll get $2,200 per month for six months or $13,200 for the year 2015.
Ed’s second option is to file for Social Security in January. Starting his benefits slightly early, his monthly rate is reduced to about $2,130. That comes out to $25,560 in total benefits for the year 2015. The downside to option two is his ongoing monthly benefit rate will be $2,130, $70 less than what he would have been getting in option one. But because he’d be getting about $12,360 less in total 2015 benefits in option one, it would take Ed a long time to make up that loss with his extra $70 per month in ongoing benefits. If I were Ed, I’d choose the second option.
Even if Ed was going to make more than the $41,880 income threshold between January and June, he only loses one dollar in Social Security benefits for each three dollars he exceeds that amount. So he probably still comes out ahead by filing in January.
Here is a quick example using that scenario. Let’s say Ed will make $50,000 between January and June. That’s $8,120 over the $41,880 limit. And one third of that excess, or about $2,707 must be deducted from his 2015 benefits. But he would still get $22,853 in benefits for the year. That’s still way better than the $13,200 he would be due by waiting until July to file for his Social Security.
I know these rules are complicated and the math in the examples above might be difficult to follow. But my overall message is easy to follow: If you’re reaching age 66 in 2015, and don’t plan on using one of the aforementioned maximizing strategies, talk to a Social Security representative sometime this month to find out if it’s to your advantage to file for those benefits in January.
If you have a Social Security question, Tom Margenau has the answer. Contact him at email@example.com.