Should You Collect Social Security Before Age 66?

Dear Relaxing Retirement Member,

We began working with new Relaxing Retirement members this past month who had a host of questions surrounding social security, so I thought I’d share my thoughts with you as well as these are questions I receive all the time. (To protect their privacy, I’ll refer to them as Al and Carla)

Since they were both age 64, one of their first questions was, “should we start collecting social security now, or wait until age 66?”

As I explained to Al and Carla, there are 2 major factors to consider before collecting social security benefits before your ‘full retirement age’ (see below).

Today, I’ll outline the first part of the answer I provided them which is the “penalty” for continuing to work.

The “Penalty”

To begin with, the reason why Al and Carla have a decision to make is because they’re both 64 years old, and Al still wants to work a little when he retires from his full time job this month. (A common phenomenon we see)

He was told that there is a penalty for taking his social security benefits if he still earns income from work.

He’s partially right. There’s a lot of confusion about what those penalties are, so let’s quickly outline the limits.

First, when you reach “full retirement age” (social security’s definition of full retirement age is age 66 for 99% of those who are reading this), you can earn as much as you want from work (earned income) and still receive your full social security benefits without any reduction in benefits.

How Social Security Defines “Income”
When Calculating Your Pre-Age 66 Benefits?

Only income you receive from work, whether that income is reported on a W-2 or 1099, is counted for social security income calculation purposes,

Income you receive from pensions, rental property, dividends and interest, and capital gains do not factor into the equation.

Between Age 62 and Full Retirement Age (FRA)

As Al is facing right now, the dilemma comes when you want to begin collecting benefits before your ‘full retirement age’.

Currently, from age 62 to 65, you lose $1 of social security benefits for every $2 of “earned” income over $15,720 (in 2016). That’s $1,310 per month.

So, for example, in Al’s case, since he’s 64, if he continues to work part-time, and he earns $15,720 from his new part-time job, he can still collect his social security benefit without any reduction in benefits penalty.

However, if he earned $39,720 from his part-time job, that’s $24,000 over the limit, so social security would withhold $12,000 (or $1,000 per month) from his social security benefits (i.e. $1 withheld for every $2 you earn over the limit).

When Al turns 65 in next year, those penalties are reduced between his 65th birthday and his full retirement age (66): he would lose $1 in benefits for every $3 he earns in excess of $3,490 per month/$41,880 per year.

So, if you’re like Al and you are planning on still working after you “retire”, you’ll want to consider these limits.

Al’s Earnings Limit When He Starts To Collect

An important distinction to note, however, is that you can earn as much as you want during the year you’re going to start collecting. These limits only apply on a monthly basis once you start collecting social security benefits.

In Al’s case, he’s 64 years old this year. If he retires at the end of July, and he has already earned $140,000 this year through July, the “earnings” litmus test does not apply to the $140,000 he’s already earned in 2016.

It only applies during the first month he begins collecting benefits. So, from August through December, he can earn an additional $6,550 ($1,310 x 5 months) and still collect his social security benefits without a reduction in benefits “penalty”.

You Can Always Change Your Mind

As many have before him, Al has struggled with his decision on whether to continue working or not. However, his decision was made a whole lot easier when I informed him that his decision was not permanent.

If he begins collecting social security and later decides that he’d like to begin working again, he can tell social security to stop sending checks until he wants them started up again.

You might find it amusing to note that we have several Relaxing Retirement members who have started and stopped numerous times! The good news is that it has always been a non-financial decision as each of them has already reached the point where they don’t have to work!

Now that we’ve clarified the first half of the equation of when to begin collecting social security, let’s tackle the second all important factor next week.

Committed to Your Relaxing Retirement,

Jack Phelps

The Retirement Coach
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(The content of this letter does not constitute a tax opinion. Always consult with a competent tax professional service provider for advice on tax matters specific to your situation.)