Why go back to work when you can have real estate for you? When Retirees Try to Go Back To Work The excess earnings test may be a hidden trap by Frank Rainaldi and William Rainaldi Does it make sense for you to keep working after you start collecting your Social Security (SS) benefits? A lot depends on when that actually is. There are two major problems if someone is still working and decides to collect early, that is, before his/her full retirement age (FRA). Actuarial Reduction This decision can be a big problem. If you start early, theres going to be a reduced benefit for life. The benefit will go down based on the table below, Early Retirement Benefits After Applicable Reduction. wealthmanagement/site-files/wealthmanagement/files/uploads/2015/01/Rainaldichart.png Example: Lets say you were born in 1954 and your primary insurance amount is $2,000. So your FRA is age 66. If you start collecting at 62, the benefit will be automatically reduced to 75 percent, so youll actually collect $1,500 per month. If you were born in 1960, that amount would be $1,400. Excess Earning Test Thats the simple part. Now lets look at the second-- and far more complicated-- disadvantage, which is the excess earnings test (EET). Basically, the EET says that if you collect early and keep on working, the benefit will go down further if you earn above a certain amount. In 2015, that amount is $15,270. If you have earnings in excess of the limit, there will be a benefit reduction of $1 for every $2 over. So if you make $25,270, the excess earnings of $10,000 will produce a $5,000 benefit reduction. To follow up on the earlier example, if your primary insurance amount was $2,000 and FRA is 66, starting at age 62 will reduce the benefit from $24,000 per year to $18,000 per year. Making $10,000 over the limit will reduce that amount further to $13,000 per year. What happens if you make $100,000 that first year? Is it possible that your benefit could be reduced all the way to zero? Yes, this does actually happen. Very often, it would be when a worker decides to retire, files for SS and then tells his employer, who then decides that they cant live without this valued employee, and makes them an offer they cant refuse. Note that the formula isnt quite as restrictive in the calendar year in which you reach FRA. In that year, the earnings limit is $41,880, and the benefit reduction is $1 for every $3 over. But keep in mind that even this only applies up until you actually reach FRA. So if you were born in 1954 and your birthday is on July 1, only the earnings for the first six months of that year would count. Once you reach FRA the EET no longer applies. At that point, you can make as much money as you can get, and there would be no reduction in benefit due to EET. Contact SS Administration If you want to retire at 62 and want to keep working, what should you do? You can start by meeting with SS Administration at your local SSA office. If excess income is anticipated, the worker will usually enlist the help of the SS Administration to determine approximately how much would be withheld during the year. How does this actually happen? When you apply for SS, one of the questions asked is if you are planning on continuing to work. If you say yes, youll have to give the SS Administration an amount that you expect to earn. Keep in mind that the Internal Revenue Service reports taxable earnings to SS, so you really need to give your best possible estimate. If you earn more than the estimate, SS will reconcile any differences in the following year. How Reduction is Made Lets say that when you estimate your earnings, the calculated reduction is 50 percent. So, instead of getting $18,000 in the first year, you would get $9,000. But that doesnt mean each check is reduced by 50 percent. SS will withhold the first six months of checks and then pay the full amount for the last six months. Does all your income count towards the EET? No. Generally, the type of income that counts is income from employment services (W-2 earnings). Interest earnings and distributions from other retirement plans dont. Self-employment income is complicated: K-1 distributions generally arent considered earned income. However, self-employed individuals may be closely scrutinized to determine if the income is from employment services or a non-employment K-1 distribution. In its operations manual, the SSA lists 88 different types of income and how each is treated. Recalculated Benefit Even if your benefit is reduced due to the EET, all isnt lost. Any benefit reduction will be incorporated into a recalculated benefit when you reach FRA. Example: Assume a worker retires early, and the excess earnings caused a 25 percent benefit reduction between ages 62 and 66. At FRA, the benefit will increase because the worker will be treated as if retirement was at age 63 rather than age 62. So, the benefit will actually increase at FRA from 75 percent to 80 percent. Source URL: wealthmanagement/retirement-planning/when-retired-clients-try-go-back-work
Posted on: Fri, 16 Jan 2015 20:06:50 +0000
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