Wendy Bennett

Some folks may plan to, or have already decided to, retire early because of job losses or lifestyle changes that occurred as a result of the pandemic and/or related demands on your personal life.

If you are among those who will collect your Social Security early, it will benefit you to understand the rules associated with taking this benefit before reaching your full retirement age (FRA) under the Social Security system. FRA is determined based on the year in which you were born.

As you may know, once you reach age 62, you can collect an early Social Security benefit. However, if you continue to work in some capacity, you will be subject to an earnings test which effectively defers Social Security benefits if your earnings are above a given threshold.

Therefore, it would good for you to understand the ins and outs of the earnings test. Earnings is defined as wages or salary received in exchange for labor. For self-employed individuals, it is net Schedule C income. It does not include “unearned” income from something other than work, such as pensions, investment income or insurance proceeds. All benefits received before FRA, as well as any benefits paid to others based on your record, are subject to the earnings test. This includes survivor benefits, spousal benefits, dependent benefits and child-in-care benefits. Earnings prior to applying for benefits don't count, nor do earnings after reaching FRA.

Here's how the earnings test works:

During the first year of collecting early benefits, and starting with the month of application, if you earn more than the monthly threshold ($1,520 for 2021), $1 in benefits will be withheld for every $2 you earn over the threshold. In the second year, the annual earning test kicks in. The threshold is $18,960 for 2021, so $1 will be withheld for every $2 you earn over the annual threshold. For example, if you earn $40,000, you'll be $21,040 over the threshold. Divide that by two ($1 subtracted for every $2 you're over), and $10,520 will be withheld from your benefit check. If you're collecting $1,750/month in benefits, that's six checks that would be subject to being withheld.

For the year you turn FRA, in the months leading up to your FRA month, the annual FRA-year earnings test applies. This test has an annual threshold of $50,520 for 2021 and there will be $1 withheld for every $3 earned over that amount. Starting in the month you turn FRA, you can earn any amount with no withholding.

If you start your benefit early but it is in the year you will reach FRA, the FRA-year monthly earnings test applies. That means for the months prior to turning FRA, $1 in benefits will be withhold for every $3 earning over the 2021 monthly threshold of $4,210 (1/12 of the annual threshold).

There is a different standard for business owners or self-employed individuals. For these people, if you work more than 45 hours a month, you will be considered “not retired” and all benefits will be withheld.

Confusing? Absolutely! But knowing the rules and which ones apply to you can save you frustration and the potential for having benefits withheld that you may be relying upon to meet your household budget.

If you're not sure what applies in your case, reach out for answers. As Confucius said, “A man who asks a question is a fool for a minute; the man who does not ask is a fool for life.”

Wendy Bennett is a senior financial adviser at Bennett Associates Wealth Management in Butler.