Q: Can you explain the rules about working after starting Social Security, and retroactive benefits? My older brother received 6 months in retroactive benefits when he filed for benefits after turning 66. I turn 66, my full retirement age in August. I normally earn about $46,000. How much can I earn without losing benefits? Would I qualify for retroactive benefits as well?
A: If you wait to file for Social Security the month in which you reach full retirement age, you can receive full benefits with no limit on how much you earn. You would also be eligible to claim up to 6 months of benefits retroactively when you apply, but you need to plan this very carefully because you wind up impacting the amount you would otherwise receive in lifetime benefits.
For example, if you apply for benefits in August, the month in which you turn 66, and you apply for 6 months retroactive benefits, your lifetime benefits would be reduced in two ways. Your initial retirement benefit amount itself would be reduced for retroactively starting benefits prior to your full benefit age. Your retroactive benefits would also be subject to earnings restriction rules for the six months prior to turning 66 in which you were still working.
Here's how. Say you are entitled to a full, unreduced monthly benefit of $1,000 ($12,000) per year. You file a claim for benefits in August, and take 6 months of retroactive benefits. Your initial benefit would be reduced from $1,000 to $966.70. That's only $33.30 per month less, and you would get an extra $5,800.20 in benefits — a good deal right? Wrong. Although you only give up about 4% of your initial benefit, that adds up over time. If you are hale and hearty and live 25 years, you wind up with $7,287 less, not more, in lifetime retirement benefits. By age 90 your monthly benefit would be just $1,699.60 instead of the $1,758.20 it would have been if you had turned down retroactive benefits.
And when you take benefits retroactively, Social Security reduces your benefits for excess earnings. Your 2014 Social Security would be $9,667. But Social Security would deduct $1 in benefits for every $3 you earn above the limit, $41,400 in 2014 ($3,450 per month). If for example you earn $26,830 before August, Social Security would reduce your benefits by $893.70 ($1 for every $3 of the $2,681 earned above the limit). You would still receive $8,773.30 for the year.
Unless you are pressed for cash, or suffer from poor health, taking retroactive benefits may not necessarily be your best choice. To learn more and to find calculators to help you with your retirement planning, visit the Social Security website at www.SocialSecurity.gov .