Deciding when to take Social Security is complex; should you take it at 63? Maybe 67? Or wait until 70? The benefits and drawbacks vary based on numerous factors, including the retirement earnings test, which applies to those claiming benefits before their full retirement age between 66 and 67.
However, many retirees need help understanding the retirement earnings test, which we will focus on for the remainder of today's post.
Simply put, the retirement earnings test applies to income over $22,320 for those under their full retirement age considering or already drawing Social Security benefits. If an individual claims benefits and earns over $22,320 annually, their benefits decrease by $1 for every $2 earned over the threshold.
For example, if a 64-year-old Jane Doe earns $25,000 this year, her social security benefits would decrease by $1,340.
$25,000 - $22,320 = $2,680 earns above the limit
$2,680 / $2 = $1,340 benefit reduction
When the Social Security recipient reaches the year of their full retirement age, the rule changes so that their benefits decrease by $1 for every $3 earned over a higher limit of $59,520, up until the month they reach their full benefit age.
Once a Social Security recipient attains their full retirement age, the beneficiary no longer has their benefits decreased for earning income. Instead, their benefits are recalculated and increased by the amounts withheld for the remainder of their life.
Therefore, the retirement earnings test is not a tax on claimants of Social Security but rather an increased payment into the program that will benefit them in the coming years.
It is important to note that if a claimant does not consider the retirement earnings test and their income rises while drawing Social Security benefits, they could be subject to a repayment of benefits come tax season. If the individual is not expecting this, they could experience a money crunch due to insufficient money for benefit repayment.
In closing, Social Security claimants should not let the retirement earnings test discourage them from drawing benefits if they think now is the ideal time to start claiming payments. Many factors go into deciding when to start one's benefits, and if you need help evaluating your situation, we are here to help.
Lundeen Abrams Advisors provides holistic retirement planning and investment management services. If you are ready to start discussing your retirement and Social Security benefits, please call us today so we can schedule a time to talk.
We will look forward to talking with you soon!
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