By Rusty Gloor, National Social Security Advisor at the AMAC Foundation, the non-profit arm of the Association of Mature American Citizens
Dear Rusty: I am 63. My birthday is 10/23/1957. I currently draw a small pension of $14K and a salary of $75K. I’m contemplating retirement at the end of April this year and I’d like to start drawing Social Security beginning June 1st. I’ve been told by friends that I won’t be able to start drawing it this year because I will already have exceeded the maximum Social Security allows me to earn in a year. Is this true? Should I postpone my retirement until the end of the year? Please advise. Signed: Confused by Friends
Dear Confused: Yours is a perfect example of why you should always check with a reputable source when receiving Social Security advice from friends.
Whenever Social Security (SS) benefits are claimed before reaching full retirement age (FRA), the so-called “earnings test” applies. This sets an earnings limit, which for 2021 is $18,960 annually – an amount you will have exceeded by the time you start your SS benefits in June. However, Social Security also has a special “first year” rule which applies to anyone who claims early Social Security benefits mid-year.
The first-year rule essentially waives using the annual earnings limit in your first year and, instead, applies a monthly earnings limit for the remainder of the year after your benefits start. The monthly limit is 1/12th the amount of the annual limit, so in 2021 the monthly limit is $1,580. Provided you don’t exceed the monthly limit after your benefits start and during the period from June 2021 through December 2021 (and if you’re fully retiring from work you won’t), you’ll not exceed the earnings limit during your first year collecting benefits. Note, your pension and other “passive” income doesn’t count toward the earnings limit; only earnings from working count. So essentially, using the “first year” rule means your earnings before you claim benefits won’t count, including any final pay you receive in the month you begin your benefits.
Starting in 2022, should you decide to return to work, you’ll be subject to the annual limit, which will be a bit more than the 2021 limit because the limit changes annually with changes to the National Average Wage Index. The earnings limit applies until you reach your full retirement age, after which you can earn as much as you like without jeopardizing your Social Security benefits. In the year you reach your full retirement age of 66 ½, your annual earnings limit will increase by about 2.6 times, further mitigating risk of exceeding the earnings limit in the year you attain FRA.
For awareness, if you were to return to work in any year between 2022 and the year prior to the year you attain FRA, and you exceed the annual earnings limit, Social Security will take back benefits equal to $1 for every $2 you are over the limit. In the year you reach FRA, if you were to work and exceed the increased limit, SS will take back benefits equal to $1 for every $3 you exceed the limit by. However, at your FRA you’ll receive time-credit for any months your benefits were withheld because you exceeded the earnings limit, which will result in your benefit amount being increased slightly at your full retirement age. In this way, you may, over time, recover any benefits which were withheld because you exceeded the earnings limit.
This article is intended for information purposes only and does not represent legal or financial guidance. It presents the opinions and interpretations of the AMAC Foundation’s staff, trained and accredited by the National Social Security Association (NSSA). NSSA and the AMAC Foundation and its staff are not affiliated with or endorsed by the Social Security Administration or any other governmental entity. To submit a question, visit our website (amacfoundation.org/programs/social-security-advisory) or email us at firstname.lastname@example.org.