The Social Security Administration estimates a man reaching 65 today can expect to live, on average, until 84 and a woman turning 65 today can expect to live until about 86. By waiting until the “magic age” of 66 you are entitled to full retirement benefit, also known as primary insurance amount, or PIA. The earnings cap disappears at full retirement age, so you may continue to work while receiving Social Security with no reduction in benefits. Also, by waiting until full retirement age, married couples, parents of dependent minor children, divorced spouses and unmarried individuals can exercise some creative claiming strategies to maximize lifetime benefits (which will be covered in following installments of this series).
Anyone who collects Social Security benefits before full retirement age – including retired workers, their spouses, divorced spouses, survivors and minor dependent children – are subject to an earnings limitation that may reduce or wipe out their benefits. To be clear, the earnings cap restrictions apply only to wages or salary from a job, not other forms of income, such as investments, pensions, government benefits or rental property. In 2014, clients lose $1 in Social Security benefits for every $2 they earn over $15,480 if they are younger than full retirement age for the entire year. The earnings cap is indexed to inflation and increases each year.
A more generous earnings cap applies in the year you reach full retirement age. In the months leading up to your 66th birthday, you can earn up to $3,450 per month – or up to $41,400 for the year – without sacrificing any Social Security benefits. If you earn more than that, you'll lose $1 in benefits for ever $3 over the earnings cap.
Benefits lost to the earnings cap are not gone forever; they are merely deferred. For example, say you claimed retirement benefits at 62 and continue to work. Assume over the next four years, you forfeited the equivalent of 24 months of Social Security benefits due to excess earnings. When you reach full retirement age of 66, the Social Security Administration will recalculate your benefits as if you first claimed Social Security at 64 rather than 62. So instead of locking in a permanent 25 percent reduction in retirement benefits, you would be reduced by just 12.5 percent (assuming your full retirement age is 66).
Meet with your financial advisor to discuss individualized claiming strategies.
I encourage my readers to call or write in with questions or comments.
Andrew Martin
542-4803
7282 Plantation Rd. Suite 400
Pensacola, FL 32504
This article originally appeared on Santa Rosa Press Gazette: Maximizing Social Security Part 2