When Will You Start Collecting Social Security Benefits: The Penalty?

When Will You Start Collecting Social Security Benefits: The Penalty?

A new Relaxing Retirement member had a host of questions surrounding social security this past month so I thought it would be a good idea to share my thoughts with you as these are questions I receive all the time.  (To protect their privacy, I’ll refer to them as Bill and Madeline)

Since they were both age 62, one of their first questions was, “should we start collecting social security now, or wait until age 66.4?”

As I explained to Bill and Madeline, there are 2 major factors to consider before collecting social security benefits before your “full retirement age”.  Today, let’s begin with “the penalty” if you begin too early:

#1: The “Penalty”

To begin with, the reason why Bill and Madeline have a decision to make is because they’re both 62 years old, and Bill still wants to work a little when he retires from his full-time job this month.  (A very common phenomenon we see)

He was told that there is a penalty for taking his social security benefits if he still earns income from work.

He’s partially right.  There’s a lot of confusion about what those penalties are, so let’s quickly outline the limits.

First, when you reach the FRA “full retirement age” (social security’s definition of full retirement age is between the age 66 and 67 for most), you can earn as much as you want from work (earned income) and still receive your full social security benefits without any reduction in benefits. 

How Social Security Defines “Income”

When Calculating Your Pre-FRA Benefits?

Only income you receive from work, whether that income is reported on a W-2 or 1099, is counted for social security income calculation purposes.

Income you receive from pensions, rental property, dividends and interest, and capital gains do not factor into the equation. 

Between Age 62 and Full Retirement Age (FRA)

As Bill is facing right now, the dilemma comes when you want to begin collecting benefits before your FRA “full retirement age”. 

Currently, from age 62 to 65, you lose $1 of social security benefits for every $2 of “earned” income over $18,960 (in 2021).  That’s $1,580 per month.

So, for example, in Bill’s case, since he’s 62, if he continues to work part-time, and he earns $18,960 from his new part-time work, he can still collect his social security benefit without any reduction in benefits penalty. 

However, if he earned $42,960 from his part-time work, that’s $24,000 over the limit, so social security would withhold $12,000 (or $1,000 per month) from his social security benefits (i.e. $1 withheld for every $2 you earn over the limit).

During the calendar year in which Bill reaches is Full Retirement Age (66.4), he would lose $1 in benefits for every $3 he earns in excess of $4,210 per month/$50,520 per year.

So, if you’re like Bill and you are planning on still working after you “retire” from your full-time position, you’ll want to consider these limits. 

Bill’s Earnings Limit When He Starts To Collect

An important distinction to note, however, is that you can earn as much as you want during the year you’re going to start collecting.  These limits only apply on a monthly basis once you start collecting social security benefits.

If Bill retired at the end of September this year, and he has already earned $190,000 this year through September, the “earnings” litmus test does not apply to the $190,000 he’s already earned this year. 

It only applies during the first month he begins collecting benefits.  So, from October through December, he can earn an additional $4,740 ($1,580 x 3 months) and still collect his social security benefits without a reduction in benefits “penalty”.        

Stay tuned for the next edition where we explore the second major factor you must consider before collecting your social security benefits: The Math!

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