Insurance Agent Forum

[somarco]

If one wants to maximize their "ROI" on Social Security retirement, what is the maximum they can earn leading up to retirement age before each additional dollar reduces their benefit?

I know that low wage earners receive a higher percentage of their income in SS benefits than do high wage earners. At what point does an additional dollar earned leading up to age 66 start reducing your benefit as a percentage of your earnings?

[SportsNut]

$ 14,160 of earned income is the allowable maxium before you start reducing benefits in 2009; (if you don't reach full retirement age of 66 within 09). Beyond that limit each $ 2 earned, costs you $ 1 in benefit reduction.

The above numbers are based on "earned income", no investment income. So one that is self employed in a business can skirt the issue nicely. Dividends rec'd from an S-Corp do not reduce your benefits. Also, one could earn monies in a C-Corp, and not take any distributions beyond the 14K, and allow other profits to accumulate for a few years. Then once you turn 66, you can earn all you want w/o reduction of benefits... so then begin taking the accumulated C-Corp earnings.

OR, if your wife is younger than you by 3 or 4 yrs, your S-Corp could pay her the excess earned income, you take the 14K in earned income to keep you under the limit, and then receive the balance as a dividend, which has no effect on reducing benefits.

Of course, never take tax advice from someone named SportsNut; always consult your personal tax advisor.

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According to SSA:

How much can you earn and still get benefits?

If you were born January 2, 1943, through January 1, 1955, then your full retirement age for retirement insurance benefits is 66. If you work and are full retirement age or older, you may keep all of your benefits, no matter how much you earn. If you are younger than full retirement age, there is a limit to how much you can earn and still receive full Social Security benefits. If you are younger than full retirement age during all of 2009, we must deduct $1 from your benefits for each $2 you earned above $14,160.
If you reach full retirement age during 2009, we must deduct $1 from your benefits for each $3 you earn above $37,680 until the month you reach full retirement age.

Full Q & A (from the SSA website)

[somarco]

Thx, but I must not have been clear in my question.

There is a formula for determining how SS benefits are determined prior to attaining the age when you receive benefits. This is much the same way as defined benefits plans operate where an average of earnings over the last 5 years, 10 years, etc.

I can't locate that formula and am trying to assist a friend who has a few years left before attaining age 62/66 and has the ability to "regulate" his current income. By keeping it low, he can maximize his SS benefit. By earning more all that is accomplished is paying more in SS taxes without increasing his SS benefit.

If he has $25,000 in SS income his benefit is roughly $2000 at age 66. If he earns $50,000 in SS income we are trying to figure out how much more his projected SS benefit will increase.

So the question is, should he defer income to save on SS taxes prior to retirement or pay more to increase his SS benefit?

[SportsNut]

Try this calculator... can't vouch for its accuracy though.

SS Calculator

It really is calculated by the Average Indexed Monthly Earnings

You could spend a day and absorb all this, do the calculations, and maybe come sloe to the correct asnwer. OR, he could go to the Soc Sec office and present the two scenarios, and have SSA do the math for him.

Without knowing the details of your client, if he is nearing retirement age, I would think that the impact of maximizing his soc security (earning more over the next few years), that the offset of higher taxes and FICA and medicare taxes would be better invested privately than any benefit that is realized by making another 25K for a few more years. It simply will not have enough impact on the overall average of all his years of earnings... to raise the AIME enough to pay much of a return. Just my opinion. Plus I always factor in the return on FICA if one does not live to collect it... Hmmm; Goose-egg, or nearly so, except for reduced survivor benefits, if you have a surviving spouse that earned less.

Clear as mud...