We received the following question about the Social Security earnings test from a reader this week…
“I am turning 62 in May and have applied for Social Security to begin in July. As I am young and healthy, I intend to work until I am at least 67. This year (2018) the earnings limit is $17,040. I will have made that by the time I retire. Therefore, my limit will be $1420 a month from July to December. The question I have is that I expect my earnings to vary quite a bit. I might go to a temp service and get a three month job that pays $10 an hour or $1733 a month which is over the limit of $1420. Maybe then, I will decide that I’ve earned enough money for 2018 so I will decide not to work anymore. My average in retirement will be $866 a month, which is below $1420 a month. What happens then?”
Let me tackle this multi-part question in pieces:
Allowed to Elect a Grace Year
You are allowed to elect a “Grace Year” once in your life where the SSA will apply the earnings test on a monthly basis, rather than annually. It is intended for exactly your situation. Since you will have earned more than the annual limit by your retirement month, you will then ask the SSA to apply the monthly $1420 limit to your monthly earnings. If you earn $1733 per month from July to December you will be over the limit by $313, causing a reduction of your SS benefit of about $156 each month (half of the $313).
Offset Applied in Each Month
Since you have elected to have the limit applied monthly, the offset will apply in each month of 2018 that you earn more than $1420. If you stop working in November or December you will not get any adjustment or benefit transferred to overages from July through October. Each month is treated independently if you elect the “Grace Year”.
After 2018 the annual application of the earnings test will apply so in the years after 2018 leading up to your Full Retirement Age (66 and 4 months) it will not matter how your earnings are distributed over the year, but instead the total earnings for the year. If they exceed the earnings limit in any of those years you will have a benefit offset applied.
Re-Calculation of Benefits
Remember that any benefit offset applied to your retirement benefit will cause a re-calculation of your benefit upon reaching your Full Retirement Age when they will give you “credit” for those lost benefits in the form of a slightly higher benefit monthly from that point.
We have other posts on the Grace Year and the Earnings Test, so if you have further questions on either, just search those topics here on the blog or reach out to us.
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