February 2, 2016 — Social Security – so misunderstood. And unfortunately, that misinformation causes many people to make very costly decisions. This article will talk about how one of those decisions – filing early and deciding not to work any more because of fear that earnings will be taken away – can jeopardize financial health. We’ll explain that mistake in detail, but first we have to give some background, including how concerns about Obamacare can complicate the decision making. Note: we are not accountants or financial experts. Before you make any important financial decision consider it carefully and get expert help.
Over the years Congress has tweaked Social Security to encourage people to work to at least Normal Retirement Age (66 for most boomers), rather than collecting sooner (the earliest you can claim is at age 62). The thought was to encourage folks to work longer and delay benefits so they have the opportunity to save more money for retirement. And, because they paid more into the SS system, they and their surviving spouses get higher benefits for the rest of their lives. Both factors result in a better chance at having a financially secure retirement.
To encourage us to work to at least our NRA Congress created an incentive – by waiting until age 66 (or NRA) we get a lot more money each month. The benefit paid at the minimum age at which we can take your retirement benefit, 62, is only 75% of what we would get at age 66. If, for example, our NRA benefit is $2000/month, our age 62 benefit would be $1500, or $500 a month less than if we waited 4 years to claim. That higher benefit goes to our surviving spouse when we die, and it could mean tens of thousands of dollars over time.
Congress also set up a disincentive for collecting retirement benefits before our NRA. If we receive benefits before our NRA and we are working, they are subject to an Earnings Test. From age 62 up until the year we reach our NRA, SS will deduct $1 from our benefits for each $2 we earn above the threshold. In the year we reach normal retirement age they will deduct $1 for every $3 we earn above a much higher threshold. For 2016 the earnings threshold is $15,720. Use this Earnings Test Calculator to determine how much your benefit might be reduced.
Although almost 50% of beneficiaries claim their benefits at age 62, most experts agree this is usually a costly retirement decision. Over the long run, beneficiaries and their surviving spouses will almost always get a higher benefit by delaying.
Beyond that, that “take early benefits” decision is compounded because many people also stop working at that point. Yes, benefits will be reduced if the relatively low earnings threshold is exceeded. BUT, this is a temporary disincentive. Any withheld benefits will be added back, starting a year after reaching full retirement age. In other words there is no tax – unless we have the misfortune to die before we collect (but our spouse will likely get them anyway). By the way, those extra earnings still put extra money in the checkbook – only a portion of SS benefits are temporarily reduced by any earnings over the limit.
The Obamacare Kicker
As several early readers of this article noted, if someone receives a low income subsidy for Obamacare health insurance, the decision to make more money or not gets trickier. Some are also concerned about higher income premiums for Medicare, but realistically that is not a factor for most retirees – higher premiums only kick in if married filing jointly MAGI is over $170,000. Medicaid is another issue. In states that expanded Medicare you can earn up to 138% of the Federal Poverty Level. The FPL was $11,770 for one person in 2015.
We used the Kaiser Family Foundation Calculator to explore what ifs for a typical retired couple on Social Security, age 62-65. In doing so we used a typical couple with a combined (primary and spousal) SS benefit of $2000/month ($24,000/year). We then calculated out of pocket premiums for the couple at various earnings levels: no earnings beyond SS; at Earnings Test limit of $15,720; additional earnings of $29,000; and earnings of $31,000. Note that the latter figure puts a couple just above the 400% of the Federal Poverty level where subsidies stop.
The Result – Only a Tiny Impact on the Obamacare Subsidy
Social Security only ($24,000)
SS plus Erngs Test lmt ($39,720)
Your Cost for a Silver Plan
$16,127/yr (no subsidy)
Note from the above that earnings up to $63,000 have only a small effect on Obamacare premiums, thanks to the premium tax credit. However, if you go above that you probably want to go way above that figure, so you make enough to pay the $10,000 in extra premiums you will encounter at that level.
Reasons why you should never not work to avoid having your benefits reduced
To summarize, here are several reasons why you not worry about working if you are under your NRA and receiving SS benefits:
1. Even if you exceed the earnings limit you will get any benefit reduction back after you hit your Normal Retirement Age. The money is not lost.
2. Any wages you earn after signing up for Social Security may increase your overall average earnings, and your benefit probably will increase. Even better, that higher benefit will be indexed to inflation – for the rest of your life.
3. A significant number of retirees are worried about having enough money for a comfortable retirement. So if you are fortunate enough to have a job, why not work as long as you can? With your earnings you’ll have less need to tap your retirement savings in those years, and you’ll probably even be able to add to those savings.
4. As long as you don’t have total earnings above 400% of the poverty level, your Obamacare premiums will not go up enough to forgo the extra income you get from working.
If you can wait to take Social Security, there are a lot of good reasons to delay. Not only for you, but for your surviving spouse, who will get those higher benefits for as long as he or she lives. But if you do take your benefit before your NRA – don’t stop working to avoid a tax – there isn’t one. You will get the reduced benefits back, and you probably won’t affect your Obamacare premiums either.
Comments? Do you have experience with this issue. If you had your benefits reduced, did you get them back? Please share your thoughts in the Comments section below.
For further reading:
What You Don’t Know About Social Security Could Hurt You