By Krista McBeath, McBeath Financial Group
Over the past few months we have been discussing Social Security. We’ve discussed when you should begin drawing your benefits and spousal benefit planning. This month we will discuss the impact of working while drawing Social Security. One of the more interesting trends seen among Baby Boomers recently is the fact that more and more Americans are still working during traditional retirement years or even going back to work after an initial retirement. Others may actually start a business in retirement. All of this working activity undoubtedly affects the Social Security benefit of the “retiree.”
In 1935 when the Social Security Act was originally passed, the law sought to actually penalize people who went back to work after taking a Social Security Retirement Benefit. However, the passage of the Senior Citizens Freedom to work act of 2000 removed penalties for working once you reach full retirement age.
The Retirement Earnings Test
The Social Security Administration uses a tool called the Retirement Earnings Test (RET) as a means of reducing a worker’s benefit based on their age and the amount of money they make. Prior to the Senior Citizens Freedom to Work Act, this test was responsible for withholding over $4 billion a year from active senior citizens still in the working world.
It is important to understand how the Retirement Earnings Test works in order know how it will affect you in your retirement. First of all, the only income this test looks at is earned income. That is, income you earned at a job or self employment. The RET is not concerned with income from an insurance policy, annuity, dividends, capital gains, interest, IRA’s etc. Also, as I mentioned before, the RET is only applicable to folks who are working, drawing Social Security Retirement Benefit, and who have not yet reached their full retirement age. Once a worker reaches their full retirement age the RET no longer applies and the individual can make as much money as they like, penalty free.
A worker is allowed to earn up to a certain amount every year that is exempt from the RET. The amount of exemption changes almost every year and is based on the national average wage index. Let’s take a look at how the RET decides how much, if any, of your Social Security benefit to withhold.
- For people attaining their full retirement age in 2014, the annual exempt amount is $41,400 (this is the higher threshold and is explained below).
- For those attaining their full retirement age after 2014, the annual exempt amount is $15,480 for 2014 (this is the lower threshold and is explained below).
- If a person makes less than the maximum exemption, the Social Security Administration will not withhold any amount from the worker’s Social Security retirement benefit.
- However, if a person makes more than the set amount for that year, the Social Security Administration will begin withholding money from the worker’s Social Security retirement benefit.
- It is important to note the earnings in or after the month that you reach your full retirement age doesn’t count toward the retirement test.
Benefit Reductions
As mentioned above, The Social Security Administration has set up two thresholds to determine how the RET will apply to an individual worker.
The lower earnings threshold is for people between age 62 and full retirement age .
The Social Security Administration will withhold $1 for every $2 of earnings in excess of $15,480/year or $1,290/month.
The higher earnings threshold is for people who are still working during the year in which they reach their full retirement age. The Social Security Administration will withhold $1 for every $3 earned above $41,400/year or $3,450/month.
This means, for example, that a person born in 1950 whose birthday is in August will be subject to the lower threshold from age 62 up until January of the year they attain full retirement age. In this example the person reaches full retirement age in 2016. So, in January 2016 this individual would be subject to the higher threshold until the end of July. After that, there is not a limit on income or reduction of benefits.
Next month we will discuss the taxation of your Social Security benefits and how the taxable amount is determined. If you missed last month’s article on determining spousal benefits, you may read it online at HealthyCellsbn.com or contact Krista at 309-808-2224.
McBeath Financial Group can help you understand your options in order to help you make a better, more informed decision concerning your entitlement. They use a proprietary Social Security report that takes a look at five main issues that face people preparing to begin their Social Security payments. You may visit their Social Security Planning site at http://thefinancialhq.com/mfg or call 309-808-2224.
Source: www.SSA.gov
Photo credit: Pgpointstudio/Thinkstock