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Many people, when pondering when to begin to collect their Social Security benefits, usually think about the month they turn Full Retirement Age, or the month they turn 62, or possibly their birthday month, or their work anniversary month (35 years on a job), etc. as the month they are going to apply for their checks.
They contact SS 3 months before that month or apply on the internet a few months before their chosen date.
I want to explain how, if you know in advance when you would like to retire, how picking January of that year might yield you thousands or even tens of thousands of dollars in extra benefits.
Certain milestones, like the year you hit 62 or 62 +1, are cut and dry. Because you are not eligible before that age, you must wait for the birth date month.
Or, those who work and make hundreds of thousands a year, well, they have to wait for their FRA month, when the amount they earn no longer counts against receiving a SS benefits, because they make too much before that month.
But, for the vast majority of folks- even those who earn $100,000 in their FRA year, they have more possibilities.
Let's go through it with Sherry, a working, now single (previously divorced) woman.
Sherry is turning 66 in August, 2016, meaning she is born in 1950. She works and earns $85000.00 a year but hates her new boss and wants to retire at the end of 2016. She is worried about her debts. She knew that beginning in August, she can work and make as much as she likes and was planning to apply 3 months before her birthday and her FRA month, May, 2016.
But, in the year you reach Full Retirement Age (FRA), SS has a very liberal work test, meaning people can work and earn quite a bit of money and still receive benefits.
In that year, SS only cares about the earnings you made before the month you reach FRA. So, for Sherry, that means January through July. Let's see how much she made in those months: $85000 divided by 12 = $7083.00 per month. Times 7 months = $49,583.00.
Also, in 2015, a person reaching FRA can earn $41880. and still receive all their benefits. We don't know how much it will be in 2016, so let's use the 2015 limits, knowing 2016 will be even higher.
From Sherry's $49583.00 SS doesn't care about the first $41,880.00, so we subtract it. That leaves $7703.00. Then SS does not care about $1.00 for every $3.00 you earn over $41880.00 so we divide the $7703.00 by 3 to see how much SS does care about. That leaves $2567.00 that Sherry is over the SS work limit for 2016. So, from her original $85000.00, SS only cares about $2567.00!
Note that the $1 for $3 is only in the FRA year. If you want to do this pre-FRA, it is $1 for $2, and a much lower limit ($15720).
Ok, now, how much is Sherry's check? Well, (I used fictitious, but plausible amounts from Quick Calculator) in August, FRA month, her benefit is $1973.00. But, we are looking at January, 2016, when she is 7 months younger. Her check that month is reduced (initially, but not permanently) to $1896.00.
Remember, SS has to withhold $2567.00 from Sherry's checks for the year. The way they do that is withholding your check, month by month, starting with your filing month. In Sherry's case, that is January's check, $1896 and then February's check, $1896.00. In her case, they are done withholding by February and they actually withheld more than they had to. SS initially withheld $3792.00. They will even it up later. SS can now pay Sherry every check beginning with March, 2016.
That is March, April, May, June, July, @ $1896.00 which totals $9480.00. Of course Sherry will also get August to December, but she already knew that. (because she reached FRA in August and was allowed to work and earn as much as she wants and still get those months).
What happens next? When 2016 is over, SS evens up the record. When they know exactly what Sherry made pre-FRA, they either pay her the difference between the $3792 and the $2567 = $1225.00, if her estimate was spot on, or if she underestimated, they might have to withhold more. If she overestimated, they owe her more.
The next thing that happens is to her reduction month calculation. Remember, to get Sherry her $9480.00 (plus possibly another $1225 -totaling $10705.00) SS reduced her benefit by 7 reduction months, the 7 months she was under FRA in January.
But, Sherry didn't get 7 checks pre-FRA, she got March, April, May, June, July, = 5 months. So, they recalculate the reduction factor to only permanently reduce her benefits by the 5 full months she got checks. SS does not care about the partial month check Sherry received in February.
So, going back to Sherry's FRA amount of $1973.00, 5 retirement reduction months is $54.75, leaving a permanent SS benefit of $1918.00.
For a reduction of $54.75, Sherry gained $10705.00. We divide the loss into the gain to see how long it would take Sherry to make up that $10705.00. It takes Sherry 195 months or 16.2 years to make up that $10705.00 if she chose not to take it, or called SS in May, 2016 (3 months before her birthday) instead of January of that FRA year.
Sherry was thrilled and is going to use her "new found money" to pay off some (or all) of her debts and be well on her way to a more secure retirement. (or whatever-I am just presenting information).
I hope you find this helpful and informative. I know everyone and every circumstance is different, but knowledge is power!
How would this work for someone who makes 170k a year and will be FRA in March 2016?
Ok, It would work great for you. First, we take $170,000.00 and divide by 12 to see how much you earn in a month. You earn $14166.00 per month. SSA only cares about 2 months- because by March you are FRA.
So, $14166 x 2 = $28333.00. You were allowed to earn $41880.00 in those two months, so you are "under the limit" and are due the checks for January and February.
In your case, it appears you would have "2 permanent reduction months", because you truly did receive 2 full checks prior to FRA.
Using quick calculator on ssa.gov, it shows a fairly good estimate for you at FRA, age 66 (March, 2016) was $2560.00. Of course, if you know your real number, use it instead.
For January, 2016, your amount is $2531.00. So, by starting 2 months early, you lose $29.00, but what do you gain? You gain $5062.00 ($2531 x 2).
To see how long it will take you to make up the $5062.00, if you decided not to take those 2 checks, we divide the loss into the gain and it takes 174 months or 14.5 years from age 66 to first break even. So, at age 80.5 you would finally have made up your loss and then from then on you would be ahead by $29.00.
Or, conversely, if you do take the $5062.00 you are ahead until age 80.5 and then every month you live past then you are losing $29.00.
To me, I would take the money and run. 5 grand is real money and can make a difference in someone's life. $29.00 at age 80+, well, it is less than a dollar month.
My plan right now (for retirement years from now) is to retire mid-year, after my birth date, but not file for SS until the following Jan.
Suppose you don't work at all in the year you file?
I may not be working at all for 5 or 6 months before I even file, and not at all in that year.
Give me a little more info and I can work it out for you. Like how old you will be at retirement- sort of like what the original poster provided. Also, about how much you earn in a year- so I can get an estimate, or if you know a FRA estimate, I can work with that, if I have months and years of birth.
But obviously, you are under the limit- so you are in the category of "not working, not collecting and waiting for a later date for a higher amount".
I, personally, am not crazy about the "not working, not collecting" strategy, but for some folks, who really seem bent on having the higher SS amount, it appeals to them. They just have to realize they are letting the government keep thousands of their dollars, month after month - after they have worked a lifetime.
I've mentioned this before, but when we (meaning SSA workers) were allowed to actually advise people what to do, we would have to have them sign a paper indicating they understood it would take more than 7 years for them to make back the money they were giving up. More than 7 years was a point SSA felt was "disadvantageous". It really becomes disadvantageous if you have an "auxiliary", like a spouse or a child who receives a check whenever you receive a check. Not only are you giving up your own, but an auxiliary is due 50% of your own as well, so the losses really compound. And, many baby boomers have minor children.
Ok thanks very much, now my concern is taxes, because he plans to try to work till May or June of 2016, but I suppose without income after that it won't affect tax rate etc.
also I was going to file for spousal when he filed. In Jan I will be 63 and 7 months, how much will it affect my benefit if he starts in Jan instead of March?
Also please one more thing, if he were to die once I have reached FRA would I get his full amount he was getting (so minus the $29.) Or would I be reduced further? I know I would stop getting the spousal benefit.
Ok thanks very much, now my concern is taxes, because he plans to try to work till May or June of 2016, but I suppose without income after that it won't affect tax rate etc.
also I was going to file for spousal when he filed. In Jan I will be 63 and 7 months, how much will it affect my benefit if he starts in Jan instead of March?
Also please one more thing, if he were to die once I have reached FRA would I get his full amount he was getting (so minus the $29.) Or would I be reduced further? I know I would stop getting the spousal benefit.
Thanks again you are such a valuable member here!
So, In terms of taxes, I am not the expert. But, if he works 1/2 the year, he will earn 1/2 the $170000, which would be $85000 and then he would be getting SS of $30372.00 (12 x $2531), plus any other income- interest, dividends, pension etc. Your SS, if you start with January (see below) would be another $12264.00.
So, at those income levels, 85% of his SS (and yours) would be subject to tax, at your tax bracket.
Now, do you have your 40 quarters or are you applying as a true "auxiliary"- a spouse who is only eligible if her spouse is eligible?
Because, if you have your 40 quarters, and you apply pre-FRA, you must take your own and then will only receive spousal if your own Full is less than one half of his own Full.
(So, if your own FRA amt is greater than $1280.00) you are not due as his spouse, before your FRA.
If you don't have your 40 quarters, then we take 1/2 of his full ($1280) and reduce it for your age at the time you begin to receive checks.
Now, if I did your month and year correctly, you are born June 1952? If so, and you start with January 2016, you will receive 29 checks at $1022.00.
If he waits until March, you would receive 27 checks at $1040.00. The difference in the percent for the 2 additional reduction months is the difference between 40.63% of his full vs. 39.93% of his full.
You lose $18.00 but gain $1022 x 2 = $2044.00. Divide $2044 by 18 and it takes you 113 months or 9.4 years to make it up.
When your husband passes, as long as you are over your FRA as a widow (which is a little younger than as a worker) you will go to 100% of what your husband was receiving. So, if he began the 2 months early, you would be going to that amount. ( Of course, there will be COLA's) paid out in the meantime.
Thank you again very much. I have almost never worked, earned a total of about 7000. in my life. I am one of those for whom the spousal benefit was originally intended, and I am very glad the benefit is still here, I have lived in fear for years that they would do away with it just before I would be eligible.
So sounds like we will be in the SS office on January 2, 2016!
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