Many people are aware that if they begin receiving social security retirement benefits prior to reaching their full benefit retirement age, their benefits will be reduced when their income exceeds a certain threshold ($15,120 in 2013). However, they may not know those lost benefits are partially restored upon reaching full retirement age. This is known as the adjustment to the reduction factor.
A few reminders to consider: first of all, remember the full retirement age is gradually increasing from 65 to 67. It’s 66 for those born between 1943 and 1954. Second, every $2 of earnings in excess of the threshold ($15,120 in 2013) can cause social security benefits to be reduced by $1. Third, keep in mind there is no earnings threshold once you reach your full retirement age. However, there is a different threshold for the year you actually reach that age.
Here’s how the partial restoration of lost benefits from excess earnings works. When you reach full retirement age, your benefit amount is recomputed so that the reduced early retirement benefit no longer includes the months when benefits were withheld for excess earnings.
Example: Partially restored benefits.
Sam begins receiving social security benefits at age 62 in January 2013. His reduced benefit is $800 a month ($9,600 for the year). He earns $23,120 ($8,000 over the $15,120 limit) in 2013. His benefits will be reduced by $4,000 (50% of $8,000), but he still receives $5,600 of his $9,600 in benefits for 2013 ($9,600 ? $4,000 = $5,600).
He continues to work and earns $8,000 more than the limit for the next three years. The Social Security Administration (SSA) withholds benefits for five months each year due to excess earnings ($4,000 reduction divided by $800 per month in benefits).
In January 2017, benefits are no longer reduced because Sam has reached his full retirement age. At that point, he will have received about $22,400 in benefits.
The SSA recomputes Sam’s reduced benefit amount to leave out the 20 months (five months each year) when benefits were withheld. Essentially, Sam’s reduced benefit is no longer based on his retiring at age 62. It is now based on his retiring at age 63 and 8 months (62 years plus 20 months). As a result, Sam’s $800 monthly benefit amount increases to about $900. (If he had waited until full retirement age to start receiving benefits, the monthly benefit amount would have been about $1,067.)
Note: This example is based on estimates. It also does not include cost-of-living increases or earnings added to the worker’s record after benefits started.
SSA automatically checks each worker’s record every year to see whether the additional earnings will increase his or her monthly benefit. If there is an increase, SSA will send the worker a letter indicating the new benefit amount.
Please contact Martini, Iosue & Akpovi by phone at (818) 789-1179 if you have questions or want more information.