I write a column similar to this one every January. But I don’t mind plagiarizing myself because it contains a very important message for people planning to retire in 2018.
January is a critical month for the potential Social Security beneficiaries who are reaching 66, their so-called full retirement age, in 2018. The important message: All of them should at least consider filing for their benefits this month, even though they may not be reaching their retirement age until later in the year.
Please note: This technique should not be employed by folks who plan to use the soon-to-disappear maximizing strategy called “file and restrict” because that procedure requires you to wait until age 66 or later before filing . Also, if you want to delay filing for your own benefits until 70 to get a 32 percent delayed retirement bonus, then you also should forgo the procedure.
But if you are not interested in either of those strategies, and you plan to start your benefits at 66 in 2018, then you may want to consider filing in January.
The reason for this early filing timeframe has to do with some quirky and complicated features of Social Security’s earnings penalty provisions. The law essentially says if you are over 62 but under your full retirement age and are still working full time, you are not eligible for Social Security. Specifically, the rules require that the SSA deduct $1 from any retirement benefits you might be due for every $2 you earn over $17,040 in 2018.
However, the rules say that once you reach your full retirement age, you are due full Social Security benefits even if you are still working.
Let’s follow an example. Let’s say Ed was born in July 1952, which means he’ll reach his full retirement age of 66 in July 2018. And let’s further say Ed generally makes about $80,000 per year and he plans to continue working . Based on the earnings penalty rules I briefly outlined above, Ed figures he must wait until July to begin collecting his benefits. As I said, at that magical point the earnings penalty rules no longer apply and he can get his Social Security. And prior to that, he’s making way more than the $17,040 threshold.
But here is why Ed should check into applying in January. Congress set up a more lenient earnings threshold for the year you reach your full retirement age. Specifically, it says you can earn up to $45,360 between January and the month you reach your full retirement age and still get benefits. And even if you earn more than $45,360, you lose only $1 from your benefits for every $3 you exceed that threshold.
Ed is going to make $40,000 between January and June. And that’s under the $45,360 threshold for 2018, which means Ed is due benefits beginning in January. He does not have to wait until July to apply for his Social Security checks.
There is a bit of a catch. By starting his benefits in January, Ed will be accepting a slightly reduced amount. (Benefits are reduced roughly one-half of 1 percent for each month they are taken before full retirement age.)
If Ed’s Social Security benefit at full retirement age is $2,000 per month, let’s look at his options.
Ed’s first option is to wait until July to start his benefits. He’ll get $2,000 per month for six months .
Ed’s second option is to file in January. Starting his benefits early, his monthly rate is reduced to $1,940. That comes out to $23,280 in total benefits for 2018. The downside to option two is his monthly benefit rate will be $1,940, $60 less than what he would have been getting in option one. But because he’d be getting about $11,000 less in total 2018 benefits in option one, it would take Ed a long time to make up that loss with his extra $60 per month in ongoing benefits. If I were Ed, I’d choose the Option 2.
I know these rules are complicated . But my overall message is easy to follow: If you’re reaching age 66 in 2018, talk to a representative sometime this month to find out if it’s to your advantage to file in January.
