Archives for August 2013

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Continuing to Work After Claiming Social Security Benefits

A reader writes in, asking:

“If I start drawing my social security at age 62, rather than age 66, but I keep on working and paying into social security until age 66, would my social security payments at age 66 approximate what I would have been receiving had I just waited until age 66 to draw in the first place?”

Your monthly retirement benefit is reduced by 5/9 of 1% for each month (up to 36 months) that you claim retirement benefits prior to your full retirement age. For each early month in excess of 36, the reduction is 5/12 of 1%. In other words, claiming 48 months early (e.g., at 62 with a full retirement age of 66), would result in your monthly retirement benefit being 25% less than your full retirement age benefit (known as your “primary insurance amount” or PIA).

However, if you claim your retirement benefit at 62 but continue working, there’s a good chance that the Social Security “earnings test” will result in you not receiving benefits for some of those months. And, once you reach full retirement age, your monthly benefit will be adjusted upward to reflect the fact that you didn’t actually receive a full 48 months of pre-FRA benefits.

How Does the Earnings Test Work?

As a result of the earnings test, for years before full retirement age during which you work while claiming your own retirement benefit, for every $2 by which your annual earnings exceed a certain amount ($15,120 in 2013), your Social Security benefit for that year will be reduced by $1.

It’s important to note, however, that this reduction in benefits is not implemented on a pro-rata basis throughout the year. Rather, it’s implemented entirely at the start of the year. For example, if your monthly benefit prior to considering the earnings test is $1,000, and as a result of the earnings test the SSA determines that $5,000 of your benefits need to be withheld this year, rather than reducing your benefit accordingly for each of the 12 months of the year, you would receive no benefit in the first 5 months and a full benefit in the last 7 months.

Also noteworthy is the fact that the earnings test works somewhat differently in the year in which you reach full retirement age:

  • The exempt amount is higher ($40,080 for someone reaching FRA in 2013),
  • $1 of benefits is withheld for every $3 of earnings in excess of the exempt amount rather than $1 being withheld for every $2 of excess earnings, and
  • Earnings for months of the year after you reach FRA are not taken into consideration.

Recalculating Benefits Upon Reaching FRA

Once you reach your full retirement age, your retirement benefit will be recalculated to account for the months in which you didn’t actually receive benefits due to the earnings test. For example, if you claimed 48 months early (which would normally result in a 25% reduction) but did not receive benefits for 20 of those months, your benefit will be recalculated upon reaching FRA as if you had only claimed 28 months early rather than 48 months early.

So, in short, the answer to your question is that the only way your retirement benefit at 66 (having claimed at 62) would be nearly the same as it would have been if you had waited until 66 in the first place is if the earnings test results in almost all of your benefits from 62-66 being withheld.

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What to Do About [Recent Economic Event]

One of the most common types of emails I receive is the email asking what to do about a particular economic event in the news (e.g, various actions by the Federal Reserve or, more recently, the Detroit bankruptcy).

My training in economics consists of precisely four undergrad courses, so I have no insights about macroeconomics that your next-door neighbor doesn’t have. And it would be downright silly for me to think that I’d somehow be able to read about a piece of economic news, foresee some consequence that the market cannot foresee, and be able to recommend a portfolio adjustment that will offer market-beating results. And frankly, I think most investors are in a similar situation.

So unless there is an obvious way in which you will be directly impacted (e.g, the news in question is the Detroit bankruptcy and you are a retiree with a Detroit city pension), I don’t see a great deal of benefit* to spending much time thinking about these things, especially not when there are so many other things that you could spend time and energy on that would have a higher probability of improving your finances (without requiring you to predict stock or bond market movements). Things like:

  • Reducing the costs of your investments,
  • Making sure your portfolio is sufficiently diversified,
  • Making sure the level of risk in your portfolio does not exceed your risk tolerance,
  • Protecting yourself against behavioral investing mistakes,
  • Tax planning,
  • Social Security planning, or
  • Making efforts to increase your earnings potential.

At a broader level, that’s the fundamental problem with most efforts to outperform a simple passive investment strategy. To be worthwhile, they not only have to have a greater than 50% likelihood of success, they have to have a greater expected payoff than the payoff you would likely get from spending a comparable amount of time/energy/money on the above list of objectives.

*Personal finance-related benefit, that is. Staying up to date on economic news can of course be worthwhile for other reasons (e.g., to be a well-informed voter). Just don’t expect it to help your portfolio in any meaningful way.

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