Liz Weston

Dear Liz: I decided to start taking Social Security benefits this summer when I turned 62. My monthly benefit is $1,809. My wife turned 62 at the end of last year and started her benefit of $841 a month. I just accepted an unexpected job offer that will pay me more than $130,000 a year. I suspect I should consider suspending my benefit at this point and work as many years with this company as possible. If I choose to suspend my benefits now and allow my benefits to remain suspended until my full retirement age of 66 years six months, I will pass up benefits of $112,000 over the next 4.5 years. Granted that amount will be overshadowed by the additional new income and the opportunity to contribute to a 401(k), but is it out of the question to continue my current benefit and just pay the 85% tax on the Social Security we receive each year in addition to our other income?

Answer: Social Security is complicated, so it’s not surprising that so many people get the details wrong. Unfortunately, those details can have a huge effect on financial well-being in retirement. The difference between the best claiming decisions and the worst can total more than $250,000, researchers have found.

Let’s start with the detail you need most: You don’t have the option right now of suspending your benefit. Only people who have reached their full retirement age can suspend. You can, however, withdraw an application within the first 12 months. You will have to pay back all the money you’ve received from Social Security, but then it will be as if you’d never applied. Your benefit can continue to grow by 5% to 8% each year until you restart your benefits or turn 70, whichever comes first.

Withdrawing your application is a good idea because otherwise your new job will offset all of your Social Security benefit.

Because you started Social Security early, you are subject to the earnings test and your benefit will be reduced by $1 for every $2 you earn over a certain limit, which in 2020 is $18,240. Your six-figure income would reduce your benefit to zero.

This earnings test disappears at full retirement age, and any money that was withheld because of it is added back into your benefit over time. In the meantime, however, you’ve given up the more valuable 5% to 8% growth in your benefit and reduced your survivor benefit as well.

Social Security taxation also works differently than what you’ve described. You never have to pay taxes equal to 85% of your benefit. If your income exceeds certain levels, then up to 85% of your benefit could be subject to taxation. (To illustrate, that means if you’re in the 10% federal tax bracket, you’d pay 10% on up to 85% of your benefit. It’s more complicated than that, but that may help you understand the difference between losing a huge chunk of your benefit and having to pay tax on a portion of it.)

Given all these complexities, it’s important for people to use a few Social Security claiming calculators before applying. Ideally, they also would consult a financial planner who’s been educated on Social Security claiming strategies.