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Timing Your Earnings in Retirement to Optimize Your Social Security Retirement Benefit

October 15, 2011

What is it?

If you work after you begin receiving Social Security retirement benefits, you may lose all or part of your retirement benefit if your earnings exceed the retirement earnings exempt amount. However, you won’t lose benefits due to excess earnings once you reach normal retirement age, and it’s possible to time your earnings in retirement in order to optimize your benefit.

Example: Lewis retired in 2010 at age 62. In 2011, he goes back to work and earns $14,800 working part-time. Since the annual retirement earnings test exempt amount is $14,160 in 2011, Lewis’s retirement benefit is reduced by $320 the following year ($1 in benefits was withheld for every $2 of excess earnings). If Lewis had reached his normal retirement age when he went back to work, he wouldn’t have lost any retirement benefit due to excess earnings.

Who can benefit from using this strategy?

If you’re under normal retirement age and earn more than the annual retirement earnings test exempt amount by working after you retire, you may benefit from timing your earnings in retirement.

Tip: Remember, though, if your monthly benefit is reduced in the short term due to your earnings, you’ll receive a higher monthly benefit later. That’s because the SSA recalculates your benefit when you reach full retirement age, and omits the months in which your benefit was reduced.

How to do it

Postpone your earnings

The easiest way to avoid losing all or part of your Social Security benefit due to excess earnings is to postpone your earnings.

You can postpone your earnings in two ways:

  • By determining when you actually work and earn income: If you’re working for an employer, your wages are counted as income in the year you earn them. Because earnings at normal retirement age or later will never reduce your Social Security retirement benefit, you might postpone working after retirement until you reach normal retirement age if you expect to have excess earnings.

Example: Leslie was bored after she retired. When she was 65, she thought about working as a used-car salesperson at the local dealership. However, she thought that she could sell a lot of cars and make a lot of money, so she decided to wait until she turned 66 (her normal retirement age) before applying at the dealership so that any excess earnings she had would have no effect on her retirement benefit.

  • By postponing when you receive your earnings: If you’re self-employed, you can limit the effect of excess earnings on your retirement benefit by postponing when you receive your earnings. This is because earnings from self-employment are treated as earnings in the year they’re received.

Example: By December 1, 2011, Keith (who is 63) makes $10,000 for the year working part-time as a carpenter. Since $10,000 is below the retirement earnings test exempt amount for 2011 ($14,160), Keith knows that his 2011 earnings won’t affect his Social Security retirement benefit. Then, he takes a $5,500 job on December 26 and becomes concerned that the job will affect his retirement benefit by pushing his 2011 earnings over the retirement test exempt amount. His wife reminds him that because he wouldn’t be paid for the job until January, those earnings wouldn’t count toward the retirement test exempt amount until 2012.

Bunch your earnings

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

Example: 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.

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: Consider the following case:
Jeff retires on September 30, 2011 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 2011 annual retirement earnings test exempt amount of $14,160, 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 $1,180 per month in 2011. However, beginning in 2012, 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.

Caution: This monthly test for excess earnings only applies if your wages are from an employer. If you are self-employed, the excess earnings test applies in a different manner.

Strengths

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

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.

Tradeoffs

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

Example: Phillip (age 63) receives a Social Security retirement benefit of $1,000, or $12,000 per year. Phillip earns $27,160 in 2011, exceeding the earnings limit of $14,160 by $13,000. Phillip loses $1 in benefits for each $2 over the earnings limit, a total of $6,500 in benefits. Phillip’s income for 2011 is:

Social Security retirement benefit $5,500
Employment earnings + $27,160
Total income $32,660

If Phillip decided that he didn’t want to lose any Social Security retirement benefits by limiting his earnings from his job to $14,160, his income in 2011 would have been:

Social Security retirement benefit $12,000
Employment earnings + $14,160
Total income $26,160

Even though Phillip lost part of his Social Security retirement benefit due to excess earnings, the money he earned from his job more than made up for the lost benefit.

Questions & Answers

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

A: 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 normal retirement age on December 1, 2011, you will be entitled to earn up to $37,680 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 2011 don’t exceed $37,680, you will receive all of your retirement benefit. However, if your earnings do exceed $37,680, you’ll lose $1 for every $3 of earnings that exceed the limit.

This material was prepared by Broadridge Communication Investor, and does not necessarily represent the views of The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, AT&T, Qwest, Chevron, Hughes, Northrop Grumman, Raytheon, ExxonMobil, Glaxosmithkline, Merck, Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

The Retirement Group is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.

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