Social Security benefits have taken on a new importance during the pandemic, particularly when it comes to workers in their sixties who have been affected by the record-high unemployment. Rather than trying to find a job in this environment at, say, age 63, some may elect to retire early.
Ash Ahluwalia, head of Social Security Planning at OneTeam Financial, says such a move may make sense but cautioned those contemplating this to examine their Social Security options carefully because the program is both more complicated and more lucrative than many people realize.
“If you know how to maximize your benefits you can get an enormous income stream from Social Security,” says Ahluwalia. “(Social Security) is not going to tell you all of the goodies on how you can maximize benefits, but I’m telling you, for most people, Social Security is probably their largest retirement asset and they’ve never looked at it.”
During an NJBIA webinar yesterday, Ahluwalia said around 2,700 rules govern the administration of Social Security benefits, and individuals applying for them have 567 different filing options. Ahluwalia stressed that his presentation is informational and should not be taken as advice. Rather, individuals should consult a professional to help them understand how the different options can impact their benefits.
The first thing to know is your “full retirement age,” which is the age at which someone can collect full Social Security benefits without any reductions. For those born in 1960 and after, the retirement age is 67. Those born before will have a retirement age of between 66 and 67 depending on how old they are.
“If you file even one day before your full retirement age, that may cost you as much as $100,000 in missed benefits because there are so many things you can do once you reach full retirement age that you can’t do prior to full retirement age,” Ahluwalia said.
This presents a dilemma for older workers who were laid off. They can receive Social Security benefits as young as 62, but their benefit checks will be reduced by 25% (assuming their retirement age is 66). That doesn’t mean the move should be avoided, Ahluwalia says. While the amount of the benefit is reduced, recipients will receive benefits for an extra four years by not waiting until full retirement age.
Another consideration is collecting Social Security early while continuing to work. Ahluwalia pointed out that people collecting Social Security can have an earned income of up to $18,240 without losing any benefits. Earning more than that will reduce their benefits.
So in the above example, if that 62-year-old takes a part-time job that raises her or his income to, they will lose $1 in benefits for every $2 over $18,240 they earn through work until they reach their full retirement age.
“Navigating this earnings test is critical if you make a decision to file for your benefits before you reach your full retirement age,” Ahluwalia said.
That’s because once someone files for Social Security they are basically locked in. Filers can undo their application as long as they act within 12 months of filing for benefits and pay back the money they’ve already received. So if the above mentioned 62-year-old gets another job six months after filing for Social Security, he or she could withdraw from the program and their future benefits would not be affected.