Social Security is one of the most important and popular American institutions. As their golden years approach, many individuals look forward to the financial support provided by Social Security during their retirement — many even depend on it to make retirement possible.
However, navigating the specifics of Social Security benefits can be a daunting task. The Social Security Act contains 21 separate “Titles” — think of them as chapters in a book — each with multiple sections. With so much complexity to the system, you could probably make a career out of understanding it thoroughly.
Martha Shedden did exactly that — in fact, she is more than just knowledgeable about Social Security. As the president and co-founder of the National Association of Registered Social Security Analysts, she is creating opportunities for tax professionals and financial advisors to become credentialed Social Security experts themselves.
What Is the First Year of Retirement Rule?
The First Year of Retirement Rule can be especially impactful to those who are considering when they will start collecting their Social Security benefits — but what is it exactly, and how does it work? Shedden shared her insight on the ins and outs of this important rule.
“The First Year of Retirement Rule applies to individuals who are younger than their full retirement age when they retire from work and begin collecting their retirement benefits in the middle of a year. The First Year rule is related to the Retirement Earnings Test Limits, which also apply to individuals who are younger than their FRA, collecting benefits and working in that year,” Shedden explained.
If you aren’t familiar with the full retirement age, or FRA, it specifies the age at which you can retire and receive your full benefits. For those born between 1943 and 1954, the FRA is 66 years of age. It increases gradually based on when you were born, eventually reaching 67 for anyone born in 1960 or later. However, you’re not required to retire at your FRA. You can retire as early as age 62 — with a reduced benefit — or wait until age 70 and receive an increased benefit.
How the First Year of Retirement Rule Works
It’s important to note that you don’t have to stop working when you begin collecting benefits, but if an individual is still working while collecting Social Security benefits and is younger than their FRA, the Social Security Administration (SSA) will withhold benefits if their earnings exceed certain annual limits.
“During the years from age 62 up to the year of FRA, the 2023 limit for these early claimants is $21,240 per year (or $1,770 per month). During the year of FRA, the 2023 limit is $56,520 per year (or $4,710 per month) and only applies to those months prior to the FRA. The earnings test no longer applies beginning the month of FRA,” Shedden said.
Many people in this younger age range retire and begin collecting benefits in the middle of the year, but they’ve already earned more than the yearly earnings limit. This is where the special First Year of Retirement Rule applies. The rule applies to earnings for one year, usually the first year of retirement.
“Under this rule, individuals can get their full Social Security benefit for any whole month they are retired, and their earnings are below the monthly limit that applies to their age. The Earnings Test limits are adjusted for inflation each year,” Shedden continued.
What Happens After the First Year?
It’s implied in the name, of course, but after your first year of collecting retirement benefits, the rules change. For those who have not yet reached their FRA and continue to work while receiving benefits, the SSA will reduce your benefit by $1 for every $2 of earnings over the limit. For example, let’s say you earned exactly $22,140 that year. That’s $1,000 over the limit, so your benefits would come down by $500.
In the year you reach your FRA, the rules change yet again — your benefit is reduced by $1 for every $3 of earnings over the limit. Thus, if you earned $59,520 that year — $3,000 over the limit — your benefits would come down by $1,000. Thankfully, once you’re past the full retirement age, these earnings limits and benefit reductions end. So if you’re still working past 67, you won’t have to worry about it.
Consider Seeking Professional Advice
If you’re still confused, don’t feel bad, it’s complicated. Don’t be afraid to talk to a financial advisor, tax accountant or other professional. They can figure out the best time to start collecting benefits based on your personal situation, as well as quantify exactly what you can expect to receive. Spending a little money up front for assistance can help ensure you receive the highest possible benefit and make your retirement that much more secure.
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