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  • Writer's pictureChris Stein, CFP®

Recovering From the Social Security Earnings Test

Back in May, 2014 I blogged on how the Earnings Test can reduce your benefits if you are receiving benefits prior to your Full Retirement Age (FRA) and have income in excess of the earnings limit.  Back in 2014 the earnings limit was $15,480/yr, while now in 2016 the limit is now $15,720/yr.  If you earn more than the limit, your SS retirement benefits will be reduced by $1 for every $2 you earn over the limit.  In my original post I mentioned that once your reach your FRA your benefit will be recalculated to adjust for these “lost” benefits.  Today I am going to describe exactly how that happens.  To keep the numbers easier to follow we will assume no cost of living adjustments during our story.

Subject to the Earnings Test

Let’s assume you turn 62 on January 1st of 2016 and claim your early SS retirement benefit as soon as you turn 62, but you still continue to work.  We will also assume your age 62 benefit is $1,500/month and at your job you will earn $21,720 in 2016.  Since you are earning more than the $15,720 annual limit you will be subject to the Earnings Test and “lose” some of your benefit.  In this example you earn $6,000 over the limit so will lose $3,000 of your 2016 benefit by either a reduction of your monthly benefit or by Social Security withholding your benefits in 2017 until they have recovered the $3,000.  In our story you will continue in this situation receiving benefits while working for three years, then you will stop working and receive an unreduced benefit.

“Lost” Money

In our story you “lost” $3,000 each year in 2016, 2017 and 2018 due to exceeding the earnings limit while collecting benefits prior to your FRA.  However, this $9,000 is not necessarily permanently lost.  You will receive a form of benefit once you reach your FRA, which in this case is age 66 and occurs in January of 2020.  Once you reach your FRA the SSA will look at that $9,000 and translate that into how many months of benefits that represents.  Since you receive $1,500 per month, the $9,000 is equivalent to 6 months of benefits.  They will then RECALCULATE your benefits as if you had claimed 6 months after you actually did.  In this case they will recalculate your benefit as if you had claimed at age 62 and 6 months, not right at 62 as you actually did.  In this case it will increase your monthly benefit by approximately 3.33%, which is $50 in our example.  With a little math we find it will take 180 months (15 years) to recover the “lost” $9,000 by receiving this additional $50 per month.

Money Does Not Disappear

So now you see why I have been putting “lost” in quotes.  The amount you lose is dependent on how long you live.  If you die on your 66th birthday the entire $9,000 is truly lost.  But if you live to 81 you will have recovered the entire $9,000 through higher monthly benefits received from age 66 to 81.

Most people believe the Earnings Test reduces their benefits and the money just disappears forever.  Hopefully I have illustrated that any loss during your pre-FRA years will actually result in a slightly higher benefit once your reach FRA.  For most people the loss is temporary and with enough patience and life-span you may get it all back.

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