Many older Americans who lost their jobs early in the pandemic and demanded social security benefits before reaching their full retirement age are now working again and regret the decision to start collecting. But there are opportunities.
Financial adviser Morris Armstrong of Cheshire, Conn., Helped such a person, 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 after, however, the man began to wonder what his quick decision would mean if the pandemic subsided and he could go back to work again.
“I could not blame him for panicking,” Armstrong says. “At that time, millions of people lost jobs. We watched TV scenes of coffins in the streets.”
Starting social security before full retirement age can reduce lifetime benefits by thousands of dollars. So people are typically advised to postpone taking social security for as long as possible to get the maximum possible benefits, and to postpone start-up benefits if they intend to continue working in a well-paid job.
But if a person has already started social security in their early 60s during hard times, as was the case for many during the pandemic, it is not a mistake to return to work. And the quick decisions made during the pandemic do not have to lock in lower social security benefits for life.
Take a Do-Over
The most tidy solution for people who find jobs shortly after applying for Social Security before full retirement age is to take what some financial planners call a mulligan or a do-over.
If it has not been more than 12 months since a person started Social Security, he or she can withdraw the application for benefits and start the clock on a fresh start with maximizing credits for Social Security. The person’s previous decision to start social security early will be regretted.
And from that point on, the social security formula that increases benefits every month – while people are working or postponing retirement – will be active again. It will maximize what a person will get when they wait until full retirement age, or even to 70, to finally decide to start social security.
Armstrong got his client to make a mulligan, even though the engineer still had no job. To claim that social security at the age of 63 would have cut 23% of the benefit the man would have received if he had been able to wait until full retirement age near 67. Armstrong reckoned that the man would eventually receive a job that pays at least $ 80,000 a year, given his strong background in engineering.
Meanwhile, the client was not in as bad shape as he had imagined. He could dive into a savings or a retirement account to get him over with for several months. So Armstrong got him to contact the Social Security Administration, withdraw his application and live off savings until he could go back to work.
Taking mulligan was an easy process. Because the man had only been receiving Social Security checks for a few 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’ benefits he had already received, and in fact wiped the board as clean as if he had never requested social security in the first place.
The applicants’ remorse
While financial planners use mulligans for individuals who acted in a hurry to claim social security in the pandemic, advisors have used them for years for other clients who seized social security in their early 60s without understanding the consequences.
Sometimes people mistakenly assume that when they turn 62, they can start social security right away and continue working full time. They reckon they want the best of both worlds – a full paycheck plus a monthly social security check.
But it does not work that way for people who have not reached full retirement age near 67, notes Elaine Floyd, who trains financial planners on social security 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 cut all the way down, depending on salary.
The government is using what is known as an earnings test. If a person earns more than a limit on a job that is $ 18,960 this year, he or she will have Social Security cut $ 1 for every $ 2 earned. Every year until full retirement age, the government makes an adjustment if the earnings test limit applies. During the year in which a person has 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 surprised people during the pandemic when people who were afraid of Covid at work decided to stop, take social security early and increase their income with part-time jobs in more secure positions.
During the pandemic, financial planner Andrea Eaton of Edina, Minn., Helped a 64-year-old woman in that situation. Given her age and work record up to that point, the woman was entitled to $ 1,396 a month in social security, and her job would pay $ 2,000 a month, for a total of about $ 3,400.
The income met the woman’s needs, but she was not aware of the earnings test that would shatter her budget expectations. Because of her job, the government would apply the earnings test to her monthly income of $ 2,000 plus about $ 18,000 that she had earned that year on her full-time job before resigning. The result: Social benefits averaged only $ 396 a month that year.
While the reduction will vary annually depending on the earnings test, her monthly income should be $ 1,000 less than she had assumed.
At first glance, many people in similar situations view the earnings test as a punishment and conclude that it is a mistake to work or that they have lost their social benefits permanently. However, the limit is temporary and is only used 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 to demand social security early in the pandemic do not 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 as a 62-year-old and relied on Social Security for 18 months while unemployed. Then she went back to a high-paying job and now earns so much every year that social security payments stop altogether because of the earnings test.
Although she does not receive social security checks during the years with large pay slips from a job, the social security money is not lost forever. It will be given to her when she reaches full retirement age. At that age, the government is recalculating the benefits people need, Pfau notes. If the woman is around 67 at full retirement age, her benefits will be calculated as if she were around 65½ years old instead of 67. This is because she previously received social security for 18 months after applying for benefits at the age of 62 But even though the earnings test stopped her from getting Social Security checks for a few years, she still has the money. And full retirement age sets the process in motion.
Even then, the woman retains the right to try to increase her income even more. At full retirement age, there is no longer an earnings test. So she can charge full retirement benefits and work as much as she wants, without any reduction in her social security check. And if she wants to increase social security further, she can suspend her benefits at full retirement age and let them continue to inflate until the age of 70.
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