Long-time readers of our blog probably know if you retire before your Full Retirement Age (FRA), which for most people today is sometime between the ages of 66 and 67 ─ but continue to work and earn a salary ─ you will be subject to a special rule called the Social Security Earnings Test. (There is no earnings test after you reach your FRA.) Under this rule you will temporarily lose $1.00 of Social Security benefits for every $2.00 you earn in excess of the “annual earnings limit”. This limit is subject to annual adjustments by the Social Security Administration and for 2016 the earnings limit is $15,720.
First Year You File
Today we want to explore what happens in the first year you file to receive your Social Security benefits. Since few people retire exactly on January 1st, but instead continue to work up to the point they finally retire later in the year, we want to discuss what happens if you retire after you already earned more than the annual earnings limit. Specifically, if your retire between age 62 and your FRA will you lose some or all of your Social Security benefits in your first year of retirement if you already earned more than the annual earnings limit?
As luck would have it, because of a special Social Security rule that applies during the first year of your retirement the short answer to that question is “NO”! However, that “no” comes with a healthy dose of “maybe” so fully understanding the special rule is important!
Understanding the First Year Rule
The best way to understand the intricacies of Social Security is to look at an example:
Let’s pretend a 64 year old male wants to retire now ─ September of 2016, with a monthly Social Security benefit of $1,500. Let’s also assume he continued to work from January until retirement in September and as a result has earned $48,000 in 2016. Since the man is retiring before his FRA he will be subject to the annual Earnings Test. As mentioned above, the 2016 earnings limit is $15,720 so the man in our example is already $32,280 over the annual earnings limit before even filing for benefits! Technically speaking, under the annual Earnings Limit Test the man in our example should have his Social Security benefits reduced $1.00 for every $2.00 he earns over $15,720. This means his benefits should be reduced by $16,140 in 2016. (One half of the $32,280 excess earnings above the annual limit.) Since he is receiving just three months of benefits (October through December) the $4,500 he is entitled to receive should be fully reduced by the Earnings Limit Test .
Once In A Lifetime Rule
Fortunately for the man in our example, he will receive all of his $4,500 in 2016 benefits! The reason is because of a special “once in a lifetime” rule the Social Security Administration (SSA) lets recipients use. Essentially the SSA will take the annual earnings limit test and apply it on a monthly basis. They will take the annual limit of $15,720 and divide it by 12. This becomes the “monthly earnings limit”. In our example that monthly limit would be $1,310. Once the man in our example begins receiving his benefit payments the SSA will only reduce his benefits in any month he earns more than $1,310.
Keep the Benefit
If he doesn’t work at all, or continues to work but earns less than $1,310 per month from October through December, he will be able to keep his entire $4,500 Social Security benefit for 2016 even though he earned substantially more than the $15,720 earnings limit before retiring! Of course the monthly application of the annual earnings limit is a one-time deal. Beginning in 2017, the Social Security Earnings Test will apply to him in the traditional annual basis.
For more information on this topic, please use the play button below.
This blog post was originally posted on July 16, 2014. The numbers have been updated to reflect the earned income limit for 2016. The numbers mentioned in the audio portion of this post have not been updated.