I recently spoke with Sue, a friend who began receiving Social Security at age 62. Sue, now 63, told me she regrets her decision.
The issue is that she discovered that joining Social Security early lowered her payout and wondered whether there was a way to enhance it.
If you’re curious, Sue’s original file was over a year ago, so she can’t do it again. (More later.)
Sue later remarked that she had an option to work part-time.
Part-time consulting employment for her former firm pays $3,000 per month (although Sue says it’s not that much labor).
Then Sue said, “But you made too much.” “Won’t that affect my SS?”
Taking this job will affect Sue’s Social Security, but nothing else. It could be part of the solution to her earlier question regarding increasing her Social Security payout.
As you may be aware, getting Social Security benefits while working has a limit on your benefit if you are under the Full Retirement Age.
In 2022, the yearly cap is $19,560, and every $2 over that limit reduces your benefits by $1.
Sue’s monthly Social Security payment is $1,100, and her new job pays $36,000, therefore Social Security will deduct $8,220 from her benefits at the start of next year.
In some cases, Social Security withholds entire months’ worth of compensation.
To deduct $8,220 from Sue’s $1,100 monthly income, Social Security will deduct 8 months’ worth of her benefits.
Assuming Sue keeps her consulting position and her wages stay roughly the same, this will go on until Sue reaches Full Retirement Age (FRA).
This will be in just over three years. She won’t be over the limit in 2022 unless something changes, like her consulting fees increasing.
Sue has had her benefits withheld for three years. The magic begins! Sue’s monthly payment will be recalculated after she reaches FRA, adding the 24 months withheld to her filing record. Her compensation will now be computed as if she submitted at age 64 (two years later than she originally filed)–an increase of over 14% to nearly $1,257.
Ready for more? Let’s fast-forward to Sue’s FRA. She likes the consulting work since it allows her to focus on other projects and spend time with her granddaughter.
Sue can earn as much as she wants after she achieves FRA, with no more benefit reductions. But, if she’s been doing OK without it for the past three years, is it really necessary to acquire it now?
Sue, now at FRA, has another option: she can suspend her benefit and collect delay credits until she is 70.
If she waited until she was 70, her benefits would grow by 8% every year (or 23% per month). With 38 months until her FRA, this equates to a 25.33 percent raise, for a new total benefit of $1,575. That’s a 43% increase in her benefits.
Recognize that Sue’s continued employment is not linked to this voluntary suspension. In other situations, she might have imposed the suspension to gain the delay credits.
Suspending benefits has a disadvantage in that it suspends any auxiliary benefits, such as a spouse benefit.
Remember that taking this job affects her Social Security, but nothing is messed up. It’s probably the response she was looking for.
In addition to the system increases, if these extra years on Sue’s earnings record are higher than what she earned earlier in her career (or perhaps replacing zero earnings years), her benefit would be increased.
I mentioned the “do-over” earlier. Sue might have withdrawn her application from Social Security and paid back the payments she had received up to that point if she had realized she had submitted too early within the first 12 months.
Then her Social Security record would be effectively wiped clean, and she could refile whenever she wanted. But only for the first 12 months after filing. After that, it’s gone.