Can your Social Security benefits be reduced?
We had a client into the office the other day. During the course of our planning conversation, she voiced an interesting Social Security question.
She wondered if she stopped working prior to her FRA (Full Retirement Age) if her Social Security benefits would be reduced?
How are Social Security benefits calculated?
Social Security benefits are based on your top 35 earning years after you turn 21. This creates two possibilities for how your Social Security benefit will be calculated:
- If you haven’t accrued 35 years of earnings, each year you fall short will count as $0 earned for that year.
- Once you’ve accrued 35 years of earnings, your lowest wage earning year will drop off with each subsequent year you complete.
It’s possible your Social Security benefits can go down…
There are two different scenarios where your Social Security benefit from full retirement age can be reduced:
- If you file for and begin receiving Social Security benefits before you hit your FRA, your lifelong Social Security benefit will drop (and perhaps by a LOT). In this situation, you will begin receiving Social Security benefits earlier in retirement, but at a reduced amount.
- The second is if you file for benefits but continue working and earn more than $15,720 (indexed for 2015). In this situation, your Social Security benefits will be reduced $1 for every $2 you earn over this amount. In the year that you attain FRA, the limit jumps to $41,880 (indexed for 2015). After you’ve passed your full retirement age, no amount of income you earn will reduce your benefits. Keep in mind however, the reduction in benefits prior to FRA are never fully lost. The benefit you receive at your full retirement age will be increased to offset the reduced Social Security benefits from your earned income.
Social Security reductions in a nutshell
Your Social Security benefits won’t drop if you don’t work or only work a little prior to your full retirement age. If you claim Social Security benefits PRIOR to your full retirement age, your benefits will definitely drop by as much as 35%. The amount depends on your age and when you claim your Social Security benefits.
Can capital gains on the sale of a home impact SS benefits? I was informed by SSA that my benefits would be reduced due to the sale. Please explain.
That’s odd. That won’t affect your current or future benefits. It may affect the taxes owed on your Social Security benefits, but not your actual amount. Additionally, you don’t have to pay capital gains tax on 250K of gain if single or 500K if married filing joint.
Hope that helps!
No, capital gains from a home sale won’t impact your Social Security benefits. It MAY impact the tax implications of those benefits however, meaning, you may have to pay more in income tax on the benefits due to the home sale. Assuming the home was a primary residence, however, you do have a pretty large exclusion on the amount of gain so it’s unlikely it would be taxable anyway but possible.
can social security benefits be reduced because of an increase in income from investments such as IRA, Annuities etc.
No, but your Medicare premiums can go up if you make too much money.
I receive my Social Security Statement every year and study the report. I intend to wait until I am seventy to begin collecting benefits. In 2017, when I was 60 years of age, I had more than 40 years in my earning record. My estimated benefit was $2114. I am still working and will continue working until 70. In 2018, my benefit dropped to $2022; in 2019 it was $2091 and in 2020 it was $2077. As my best 35 earning years have not change since 2017, why has my SSA benefit been taking such a roller coaster ride? Is there anything I can do to correct this and make certain that my future benefit does not continue to decrease?
Your ultimate benefit will depend on the indexing factors used to adjust your 35 years of earnings for inflation. This will happen in the year he turns 62, using the indexing factors announced the prior October. For anyone under age 62, SSA bases their benefit estimates on what they think these indexing factors will be. They often tweak these estimates from year to year based on their outlook for inflation, economic growth, etc. That’s why you’re seeing volatility in your Social Security Full Retirement Age Benefit – basically the inflation factor.