Dear Rusty: I turned 63 Aug. 12, 2019. I will be retiring June 30, 2020 from my current job. I will have made approximately $35,000 by then and am receiving severance pay of $19,000 on June 30th. Will the pay I receive through June 30th affect what I can draw from Social Security? Also, how much of a difference would it be if I wait until August 12th, 2020 to officially start drawing Social Security? Is there any other information I should be aware of before I start drawing Social Security? Signed: Anxious to Retire
Dear Anxious: First, let me assure you that the money you earned this year before your benefits start aren’t counted as part of Social Security’s “earnings test” which could affect your payment after your benefits start. When you claim, your Social Security benefit amount will depend upon two things – your “primary insurance amount” (or “PIA”) which is determined from your highest earning 35 years (adjusted for inflation) over your lifetime, and the age at which you claim your SS benefit. By claiming at age 64 in August, your benefit will be cut by about 15.6% from what it would be if you wait to claim at your full retirement age (66 plus 4 months). Your earnings for 2020 won’t be applied to your SS record until after you file your 2020 taxes in 2021, so won’t affect your benefits (if appropriate) until after that. If your 2020 earnings are more than any of those in the 35 years used to initially compute your benefit, your benefit will increase at that time. The day of the month you were born isn’t significant, only the month. So, if you apply to start benefits in August of 2020, your benefit cut will be as stated above because you’re claiming exactly 2 years and 4 months early. But if you wait longer you’ll gain another 5/9ths of 1% (.556%) for each additional month you delay up until your full retirement age (FRA).
Although you plan to retire from work, be aware that if you decide to return you’ll be subject to Social Security’s earnings limit once you are collecting benefits before your FRA, and that will be the case until you reach your full retirement age. If you go back to work after you start your SS and earn more than $1,520 in any remaining month of 2020, you’ll not be entitled to benefits for that month. Starting in 2021, you’ll be subject to an annual earnings limit of at least $18,240 (that’s the 2020 limit – limits for future years aren’t yet known but will be higher). Exceeding the annual limit will cause SS to withhold half of anything you earn over the limit. The limit is more, and the penalty is less in the year you reach your FRA and goes away once you have reached your full retirement age.
Finally, to be sure you’re aware, you can actually defer claiming SS until age 70 if you wish. After you reach your full retirement age you’ll earn delayed retirement credits (DRCs) of 8% per year of delay, which are added to your benefit when you finally claim it. That would give you a benefit which is 29% more at age 70 than it would be at your full retirement age.
Russell Gloor is an Association of Mature American Citizens certified social security advisor. To submit a question, visit amacfoundation.org/programs/social-security-advisory or email ssadvisor@amacfoundation.org.
