Beware If Clients Collecting Social Security Start Working After Retirement
Does it make sense for your client to keep working after he starts collecting his
Actuarial Reduction
This decision can be a big problem. If your client starts early, there’s going to be a reduced benefit for life. The benefit will go down based on the table below, “Early Retirement Benefits After Applicable Reduction.”
Example: Let’s say your client was born in 1954 and his primary insurance amount is
Excess Earning Test
That’s the simple part. Now let’s look at the second-- and far more complicated-- disadvantage, which is the excess earnings test (EET).
Basically, the EET says that if your client collects early and keeps on working, the benefit will go down further if he earns above a certain amount. In 2015, that amount is
What happens if the client makes
Note that the formula isn’t quite as restrictive in the calendar year in which your client reaches FRA. In that year, the earnings limit is
Contact
If your client wants to retire at 62 and wants to keep working, what should he do? He can start by meeting with
How does this actually happen? When your client applies for SS, one of the questions asked is if the client is planning on continuing to work. If your client says “yes,” he’ll have to give the
How Reduction is Made
Let’s say that when your client estimates his earnings, the calculated reduction is 50 percent. So, instead of getting
Does all your client’s income count towards the EET? No. Generally, the type of income that counts is income from employment services (W-2 earnings). Interest earnings and distributions from other retirement plans don’t. Self-employment income is complicated: K-1 distributions generally aren’t considered earned income. However, self-employed individuals may be closely scrutinized to determine if the income is from employment services or a non-employment K-1 distribution. In its operations manual, the SSA lists 88 different types of income and how each is treated.
Recalculated Benefit
Even if your client’s benefit is reduced due to the EET, all isn’t lost. Any benefit reduction will be incorporated into a recalculated benefit when your client reaches FRA. Example: Assume a worker retires early, and the excess earnings caused a 25 percent benefit reduction between ages 62 and 66. At FRA, the benefit will increase because the worker will be treated as if retirement was at age 63 rather than age 62. So, the benefit will actually increase at FRA from 75 percent to 80 percent.
In our next column, we’ll look at what happens when your client continues to work after FRA.
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