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Many older Americans who lost their jobs at the start of the pandemic and applied for Social Security benefits before reaching full retirement age are working again and regret the decision to start collecting. But there are options.
Financial adviser Morris Armstrong, of Cheshire, Connecticut, helped one such person, a 63-year-old man who panicked when he lost his engineering job at the start of the pandemic and immediately filed for Social Security before asking advice. Soon after, however, the man began to wonder what his instant decision would mean if the pandemic abated and he could return to work.
“I couldn’t fault him for panicking,” Armstrong said. “Back then, millions of people were losing their jobs. We watched scenes of coffins in the streets on television. ”
Starting Social Security before full retirement age can reduce lifetime benefits by thousands of dollars. People are therefore generally advised to delay taking over social security as much as possible to obtain the maximum possible benefits, and to postpone severance benefits if they intend to continue working in a job. well paid.
But if a person has already started Social Security in their early 60s during tough times, as many did during the pandemic, returning to work is not a mistake. And instant decisions made during the pandemic don’t have to lock in lower social security benefits for life.
Make a transition
The easiest solution for people who find a job soon after filing for Social Security before full retirement age is to take what some financial planners call a mulligan, or takeover.
If no more than 12 months have passed since a person started receiving Social Security, they can withdraw their claim for benefits and start over to maximize Social Security credits. The person’s previous decision to start Social Security earlier will be overturned.
And from then on, the Social Security formula that increases benefits every month – while people are working or delaying retirement – will be active again. This will maximize what an individual will get by waiting for full retirement age, or even 70, to finally decide to start social security.
Armstrong asked his client to make a mulligan even though the engineer still had no work. Claiming social security at age 63 had reduced the benefits the man would have received by 23% if he had been able to wait until the age of full retirement almost 67. Armstrong figured the man would end up getting a paid job of at least $ 80,000 a year given his strong engineering background.
Meanwhile, the client was not as badly off as he imagined. He could dip into a savings or retirement account to hold it for several months. So Armstrong asked him to contact the Social Security Administration, withdraw his claim, and live off his savings until he could return to work.
Taking the mulligan was an easy process. Because the man had only been receiving Social Security checks for a few months, he was in the 12-month window that allows people to change their minds after starting Social Security. He was able to repay the few months of benefits he had already received, effectively wiping the slate off as if he had never applied for Social Security in the first place.
Applicants remorse
While financial planners have used mulligans for people who acted in haste to claim Social Security during the pandemic, advisers have been using them for years for other clients who caught Social Security in their early 60s without appreciate the consequences.
Sometimes people mistakenly assume that once they are 62 they can immediately start Social Security and continue working full time. They think they will have the best of both worlds: a big paycheck plus a monthly Social Security check.
But it doesn’t work that way for people who haven’t reached full retirement age nearing 67, notes Elaine Floyd, who trains financial planners in Social Security claim strategies. And this is where a mulligan can be used to undo the situation.
If a person claiming Social Security is younger than full retirement age and earns more than $ 18,960 in a job, benefits will be reduced or eliminated altogether, depending on the salary.
The “earnings test”
The government uses what is called an earnings test. If a person earns more than a limit for a job, which is $ 18,960 this year, he or she will have a Social Security reduction of $ 1 for every $ 2 earned. Each year until full retirement age, the government makes an adjustment if the earnings limit applies. In the year that a person reaches full retirement age, the limit jumps. This year it’s $ 50,520 and $ 1 in $ 3 is cut from Social Security.
Income tests took people by surprise during the pandemic when people fearful of Covid at work decided to quit, take out social security earlier and increase their income with part-time jobs in positions more secure.
During the pandemic, financial planner Andrea Eaton in Edina, Minnesota helped a 64-year-old woman in this situation. Based on her age and work history, the woman was entitled to $ 1,396 per month in Social Security and her job would pay $ 2,000 per month, for a total of about $ 3,400.
The income met the woman’s needs, but she was unaware of the income test that would crush her budget expectations. Because of her job, the government would apply the income test to her monthly income of $ 2,000, plus about $ 18,000 that she had earned that year from her full-time job before quitting. The result: Social Security benefits averaged just $ 396 per month that year.
Although the reduction varied each year based on the earnings test, her monthly income was going to be $ 1,000 less than she had assumed.
At first glance, many people in similar situations see the income test as a penalty and conclude that it is a mistake to work or that they have permanently lost their Social Security benefits. But the blow is temporary, applied only during periods when the earnings test applies before full retirement age.
No benefit is lost
And people who missed the 12-month window to receive a mulligan for claiming Social Security at the start of the pandemic don’t have to kick themselves now. They have not lost any social security.
Wade Pfau, author of the Retirement Planning Guidebook and professor at the American College of Financial Services, gives this example: Then she returned to a well-paying job and now earns so much each year that Social Security payments stop completely. due to the income test.
Even if she doesn’t receive Social Security checks during those years of big work paychecks, Social Security money isn’t lost forever. It will be paid to him when he reaches full retirement age. At this age, the government is recalculating what benefits people should be receiving, Pfau notes. If the woman is around 67 at full retirement age, her benefits will be calculated as if she were around 65 and a half instead of 67. This is because she has already benefited from social security. for 18 months after claiming benefits at age 62. test prevented her from getting social security checks for a few years, she still owes the money. And the full retirement age kicks off the process.
Even then, the woman retains the right to try to increase her income even more. At full retirement age, there is no longer any compensation criterion. Thus, she can receive full retirement benefits and work as much as she wants without any reduction in her social security checks. And if she wants to strengthen social security further, she can suspend her benefits at full retirement age and let them continue to swell until age 70.
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