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 2022.
January is a critical month for the hundreds of thousands of potential Social Security beneficiaries who are reaching 66 and 4 months, their so-called full retirement age (FRA), in 2022. 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.
Please note that if you want to delay filing for your Social Security benefits until 70 to get the “delayed retirement credit” of almost 32 percent added to your monthly benefits, then you should forgo the procedure discussed in this column.
But if you are not interested in that strategy, and plan to start your benefits at your FRA in 2022, then, as I said, you may want to consider filing for benefits in January.
The reason for this early filing time frame 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.
The law essentially says if you are older than 62 but younger than your full retirement age and are still working full time, you are not eligible for Social Security. Specifically, the rules require that the Social Security Administration deduct $1 from any retirement benefits you might be due for every $2 you earn over $19,560 in 2022.
However, the rules say that once you reach your full retirement age, you are due full Social Security benefits, even if you are still working and no matter how much money you are making.
Let’s follow an example. Let’s say Ed was born in March 1956, which means he'll reach his full retirement age of 66 and 4 months in July 2022. And let’s further say Ed generally makes about $80,000 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 $19,560 income threshold.
But here is 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 $51,960 between January and the month you reach your full retirement age and still get Social Security benefits. And even if you earn more than $51,960, you lose only $1 from your benefits for every $3 you make over that threshold.
Ed is going to make $40,000 between January and June (i.e., before he reaches the magic age of 66 and 4 months). And that’s under the $51,960 threshold for 2022, which means Ed is due benefits beginning in January. He does not have to wait until July to apply for his Social Security checks.
But 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 0.5 percent for each month they are taken before full retirement age).
If Ed’s Social Security benefit at full retirement age is $2,500 per month, let’s look at his options.
Ed’s first option is to wait until July to start his Social Security benefits. He'll get $2,500 per month for six months or $15,000 for the year 2022.
Ed’s second option is to file for Social Security in January. Starting his benefits slightly early, his monthly rate is reduced to about $2,400. That comes out to $28,800 in total benefits for the year 2022. The downside to option two is his ongoing monthly benefit rate will be $100 less than what he would have been getting in option one. But because he'd be getting about $13,800 less in 2022 benefits in option one, it would take Ed a long time to make up that loss with his extra $100 per month in ongoing benefits.
Even if Ed was going to make more than the $51,960 income threshold between January and June, he only loses $1 in Social Security benefits for every $3 he earns over that amount. So he still might come out ahead by filing in January.
Here is a quick example using that scenario. Let’s say Ed will make $60,000 between January and June. That’s $8,040 over the $51,960 limit. And one-third of that excess, or $2,680, must be deducted from his 2022 benefits. But he would still get $26,120 in benefits for the year. That’s still way better than the $15,000 he would be due if he were to wait until July to file for his Social Security.
Please note that this strategy generally only works for those who turn full retirement age in early to mid-2022 and whose earnings prior to reaching FRA are at least close to the $51,960 limit. In other words, if you will make a lot more than $51,960 this year or if you reach your full retirement age later in the year you should probably just wait until your FRA to file for your Social Security benefits.
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 and 4 months in early to mid-2022, you might want to talk to a Social Security representative sometime this month to find out if it’s to your advantage to file for your benefits to start in January.
One word of caution. Many readers in the past told me that when they tried to file in January, Social Security Administration (SSA) representatives told them they could not do so. Sadly, far too many SSA agents are unfamiliar with how these rules work. If you run into the same problem, ask to speak to a supervisor.
One final note. I know from experience that many people are just bound and determined to get their full benefit rate by waiting until they reach FRA to start their benefits. If you are in that category, that’s just fine. Frankly, it does make your Social Security experience simpler.
