Many older Americans who lost their jobs early in the pandemic and claimed Social Security benefits before reaching their full retirement age are now working again and regret the decision to start collecting. But there are options.
Financial advisor Morris Armstrong, of Cheshire, Conn., helped such an individual, a 63-year-old man who had panicked when he lost his engineering job early in the pandemic and immediately applied for Social Security before seeking guidance. Soon afterward, however, the man started to wonder what his snap decision would mean if the pandemic eased and he could go back to work again.
“I couldn’t blame him for panicking,” Armstrong says. “At the time, millions of people were losing jobs. We were watching scenes on TV of caskets in the streets.”
Starting Social Security before full retirement age can cut lifetime benefits by thousands of dollars. So people are typically advised to delay taking Social Security as long as possible to get the maximum possible benefits, and to postpone starting benefits if they intend to keep working in a well-paying job.
But if a person has already started Social Security in their early 60s during tough times, as was the case for many during the pandemic, returning to work isn’t a mistake. And the snap decisions made during the pandemic don’t have to lock in lower Social Security benefits for life.
Take a Do-Over
The tidiest solution for people who find jobs soon after filing for Social Security before full retirement age is to take what some financial planners call a mulligan, or a do-over.
If no more than 12 months have passed since an individual started Social Security, he or she can withdraw the application for benefits and start the clock fresh on maximizing credits for Social Security. The person’s previous decision to begin Social Security early will be undone.
And from that point on, the Social Security formula that boosts benefits each month—while people work or delay retirement—will be active again. That will maximize what an individual will get as they wait until full retirement age, or even to 70, to finally decide to start Social Security.
Armstrong had his client do a mulligan even though the engineer still had no job. Claiming Social Security at age 63 had cut 23% from the benefit the man would have received if he had been able to wait until full retirement age near 67. Armstrong figured the man would eventually get a job paying at least $80,000 a year given his strong background in engineering.
Meanwhile, the client wasn’t in as dire shape as he imagined. He could dip into savings or a retirement account to tide him over for several months. So Armstrong had him contact the Social Security Administration, withdraw his application, and live on savings until he could go back to work.
Taking the mulligan was an easy process. Because the man had been getting Social Security checks for only a couple of months, he was within the 12-month window that lets people change their minds after starting Social Security. He was able to repay the few months of benefits he’d already received, effectively wiping the slate as clean as if he’d never requested Social Security in the first place.
While financial planners are using mulligans for individuals who acted in haste to claim Social Security in the pandemic, advisors have been using them for years for other clients who grabbed Social Security in their early 60s without appreciating the consequences.
Sometimes people assume erroneously that once they are 62, they can start Social Security immediately and keep working full time. They figure they will have the best of both worlds—a plump paycheck plus a monthly Social Security check.
But it doesn’t work that way for people who haven’t reached full retirement age near 67, notes Elaine Floyd, who trains financial planners about Social Security claiming strategies. And that’s where a mulligan may be used to undo the situation.
If a person who claims Social Security is younger than full retirement age and earns more than $18,960 in a job, benefits will be reduced or cut completely, depending on the salary.
The ‘Earnings Test’
The government uses what’s known as an earnings test. If a person earns more than a limit on a job, which is $18,960 this year, he or she will have Social Security cut $1 for every $2 earned. Each year until full retirement age, the government makes an adjustment if the earnings test limit applies. During the year when a person is going to reach full retirement age, the limit jumps. This year it’s $50,520 and $1 of $3 is cut from Social Security.
The earnings tests took people by surprise during the pandemic when people afraid of Covid at work decided to quit, take Social Security early, and augment their income with part-time jobs in safer positions.
During the pandemic, financial planner Andrea Eaton in Edina, Minn., helped a 64-year-old woman in that situation. Given her age and work record up to that point, the woman was eligible for $1,396 a month in Social Security and her job would pay $2,000 a month, for a total of roughly $3,400.
The income met the woman’s needs, but she wasn’t aware of the earnings test that was going to crush her budget expectations. Because of her job, the government would apply the earnings test to her $2,000 monthly income, plus about $18,000 she’d earned that year on her full-time job before quitting. The result: Social Security benefits were only going to average $396 a month that year.
While the reduction will vary yearly depending 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 look at the earnings test as a penalty and conclude that it’s a mistake to work or that they have lost their Social Security benefits permanently. But the hit is temporary, applied only during the periods when the earnings test applies before full retirement age.
No Benefits Are Lost
And people who missed the 12-month window to take a mulligan for claiming Social Security early in 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: A woman lost her job and started Social Security at 62, and for 18 months relied on Social Security while unemployed. Then she went back to a high-paying job and now earns so much each year that Social Security payments stop completely due to the earnings test.
Even though she doesn’t get Social Security checks during those years of hefty paychecks from a job, the Social Security money isn’t lost forever. It will be provided to her when she reaches full retirement age. At that age, the government recalculates the benefits people should be provided, notes Pfau. If the woman is about 67 at full retirement age, her benefits will be calculated as though she was about age 65½ instead of 67. That’s because she previously got Social Security for 18 months after applying for benefits at age 62. But even though the earnings test stopped her from getting Social Security checks for a couple of years, she is still due the money. And full retirement age sets the process in motion.
Even then, the woman retains the right to try to beef up her income even more. At full retirement age, there is no longer an earnings test. So she can collect full retirement benefits and work as much as she wants without any reduction in her Social Security checks. And if she wants to beef up Social Security further, she can suspend her benefits at full retirement age, and let them keep inflating all the way to age 70.
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