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 2012.
January is a critical month for the hundreds of thousands of potential Social Security beneficiaries who are reaching their so-called full retirement age in 2012. The important message: All of them should at least consider the possibility of filing for their benefits this month, even though they may not be reaching their retirement age until later in the year.
The reason for this early-filing timeframe has to do with some quirky and complicated features of Social Security's earnings penalty provisions. Those provisions generally keep seniors who are still working off of Social Security's rolls until they reach that magic "full retirement age." For most people reading this column, your full retirement age is probably 66. (Check out SocialSecurity.gov for a chart listing the various full retirement ages.)
The law essentially says that if you're 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 $14,640 in 2012.
However, the rules say that once you reach your full retirement age, you are due full Social Security benefits, even if you're still working and no matter how much money you're making.
Let's follow an example. Let's say Ed was born in July 1946, which means he'll reach his full retirement age of 66 in July 2012. And let's further say Ed generally makes about $60,000 per year and he plans to continue working indefinitely. Based on the earnings penalty rules I briefly outlined above, Ed figures he must wait until July (his full retirement age) to begin collecting his Social Security 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 $14,640 income threshold.
But here's why Ed should check into applying for Social Security 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 $38,880 between January and the month you reach your full retirement age and still get Social Security benefits. And even if you earn more than $38,880, you lose only $1 from your benefits for every $3 you exceed that threshold.
Ed is going to make $30,000 between January and June (i.e., before he reaches the magic age of 66). And that's under the $38,880 threshold for 2012, 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 one percent for each month they're 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 (his full retirement age) to start his Social Security benefits. He'll get $2,000 per month for six months or $12,000 for the year 2012.
Ed's second option is to file for Social Security in January. Starting his benefits slightly early, his monthly rate is reduced to $1,940. That comes out to $23,280 in total benefits for the year 2012. The downside to Option 2 is that his ongoing monthly benefit rate will be $1,940 — $60 less than what he would have been getting in Option 1. But because he'd be getting about $11,000 less in total 2012 benefits in Option 1, 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 Option 2.
Even if Ed were to make more than the $38,880 income threshold between January and June, he only loses one dollar in Social Security benefits for each three dollars he exceeds that amount. So he probably still comes out ahead by filing in January.
I know these rules are complicated, and the math in the examples above might be difficult to follow. But my overall message is easy to follow: If you're reaching age 66 in 2012, talk to a Social Security representative sometime this month to find out if it's to your advantage to file for those benefits in January.