I write a column like this every January, but I don’t mind plagiarizing myself as it has a very important message for people considering retirement in 2023.
January is a critical month for the hundreds of thousands of potential Social Security recipients who reach 66 and 6 months, their so-called full retirement age (FRA), in 2023. The important message: All should at least consider the possibility of filing for benefits this month, even though they may not reach retirement age until later in the year.
Please be aware that if you wish to delay filing your Social Security benefits until age 70 to benefit from the “deferred retirement credit” of approximately 30% added to your monthly benefits, then you must forgo the procedure described in this column. . Also, if you are one of those people who absolutely insist on waiting for your FRA to file a claim for benefits, then forget about the message in this column.
But if you’re open to the possibility of increasing your benefit payment for 2023, you might want to consider filing for benefits in January.
The reason for this early filing delay has to do with some bizarre and complicated features of Social Security’s income penalty provisions. These provisions generally keep older people who are still working off the Social Security rolls until they reach the magic age of full retirement.
The law basically states that if you are over 62 but have not reached full retirement age and are still working full time, you are not eligible for Social Security. Specifically, the rules require the Social Security Administration to deduct $1 from any retirement benefits you may be owed for every $2 you earn above $21,240 in 2023.
However, the rules state that once you reach full retirement age, you are entitled to full Social Security benefits even if you are still working and regardless of the income you earn.
Let’s follow an example. Let’s say Ed was born in January 1957, which means he will reach full retirement age of 66 and 6 months in July 2023. Let’s further say that Ed typically earns around $80,000 a year and that he plans to continue working indefinitely. Based on the earnings penalty rules I briefly outlined above, Ed thinks he has to wait until July (his full retirement age) to start collecting his Social Security benefits. Like I said, at that magical moment, the earnings penalty rules no longer apply and he can get his social security. Prior to that, he earned well over the $21,240 income threshold.
But here’s why Ed should check his Social Security application in January. Congress has established a more lenient pay threshold for the year you reach full retirement age. Specifically, it says you can earn up to $56,520 between January and the month you reach full retirement age while still receiving Social Security benefits. Even if you earn more than $56,520, you only lose $1 of your benefits for every $3 you exceed that threshold.
Ed is going to make $40,000 between January and June (ie before he reaches the magic age of 66 and 6 months). That’s under the $56,520 threshold for 2023, meaning Ed will receive benefits starting in January. He does NOT have to wait until July to apply for his Social Security checks.
There is a small catch. Starting his benefits in January, Ed will accept a slightly reduced amount. (Benefits are reduced by approximately one-half of 1% for each month they are taken before full retirement age.)
If Ed’s Social Security benefit at full retirement age is $2,500 a month, let’s look at his options.
Ed’s first option is to wait until July to start his Social Security benefits. He will receive $2,500 per month for six months or $15,000 for the year 2023.
Ed’s second option is to file for Social Security in January. Starting his benefits a little earlier, his monthly rate is reduced to around $2,400. This amounts to $28,800 in total benefits for the year 2023. The downside to Option #2 is that his ongoing monthly benefit rate will be $100 less than what he would have gotten in the option #1. But because he would get about $13,800 less in 2023 benefits in option #1, it would take Ed a long time to make up for that loss with his extra $100 per month in continuing benefits .
Even if Ed were to earn more than the $56,520 income threshold between January and June, he only loses $1 in Social Security benefits for every $3 he exceeds that amount. So, he could still come out on top filing in January.
Here is a quick example using this scenario. Let’s say Ed will earn $60,000 between January and June. That’s $3,480 above the $56,520 limit. One-third of that excess, or $1,160, must be deducted from his 2023 benefits. But he would still receive $27,640 in benefits for the year. That’s still way better than the $15,000 he would be owed by waiting until July to file for Social Security.
Please note that this strategy generally only works for those who reach full retirement age in early or mid-2023 and whose earnings prior to reaching FRA are at least close to the $56,520 limit. . In other words, if you’re making a lot more than $56,520 the year you reach full retirement age, or if you reach your FRA later in the year, you should probably wait the month from your FRA to apply for your social security benefits.
I know these rules are complicated and the calculations in the examples above can be difficult to follow. But my overall message is easy to follow: If you reach your full retirement age sometime in early to mid-2023, you may want to speak to a Social Security representative during that month to find out if it is in your interest to apply for your benefits. start in January.
A word of warning: Many readers have told me in the past that when they tried to file in January, Social Security Administration officials told them they couldn’t. Unfortunately, far too many SSA agents are unaware of how these rules work. If you have the same problem, tell that person to check with their supervisor.