If you’re like most Americans, you plan to sprint to the Social Security Administration’s office to claim your retirement benefits the minute you turn 62. Before you run, I highly recommend you research all of your options.
Let me share an example with you. Roger and Suzy are married. Suzy is 62; Roger is 64. Suzy’s full retirement age is 66, she makes $50,000 per year and her projected benefit is $1,500 per month based on her income history. Roger’s full retirement age is 66, he makes $70,000 per year and his projected benefit is $2,000 per month. Both enjoy working and plan to remain in the workforce until they reach full retirement age.
Suzy thinks it might be a good idea to elect to take her benefits early; even though they will be permanently reduced by 25 percent for the rest of her life. Having an extra $1,125 per month would be nice, but there is one very important caveat she needs to consider. When she elects to take benefits before full retirement age, she will be subject to income limitations that can drastically reduce her monthly benefit. Her Social Security benefits will be reduced by $1 for every $2 earned beyond $15,120 in 2013. Given this rule, she currently makes $34,880 beyond the income limit, which means her entire monthly Social Security benefit will be withheld.
This example essentially will eliminate her entire benefit from 62 to full retirement age if she continues to work and earn $50,000 per year. It’s not exactly what Suzy intended to do when evaluating whether to take her benefits early. On top of that, her monthly benefit would be reduced by 25 percent for good, even when she reaches full retirement age and she’s not subject to the income threshold.
On the other hand, if Suzy decides to retire and collect benefits, Roger’s income will not affect her monthly benefit as it pertains to income limitation rule. The rule is applied to each individual’s income per year. That being said, her monthly benefit still would be reduced by 25 percent by taking benefits early.
Social Security will play a major role in your retirement income planning. Do your homework before you go sprinting to the SSA office on your 62nd birthday.
Joel Harris is a financial advisor with TFA. He may be reached at 507.1825.