High earners could be in for a shock if they claim benefits early

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John Brenkovich wasn’t about to let his client make the mistake that so many people in similar circumstances make: He wanted to apply for Social Security early.

Aside from receiving a significantly reduced benefit for the rest of his life, the client wouldn’t, as he assumed, actually receive his benefit early. In fact, he would have to wait two years, when he hit his full retirement age, to see his first Social Security check.

The reason for the delay? He was making too much money, Brenkovich, a CFP and the principal of Brenkovich Financial Management in Mamaroneck, N.Y., told the 64-year-old widower.

Brenkovich explained that the client would be subject to an earnings test if he claimed early. That meant that half of anything he earned above the earnings test limit of $15,720 would be withheld until he was 66.

Most advisers know about the reduced benefits from claiming early, but few are aware of the Social Security earnings test that can delay those benefits for an extended period of time for high earners, Brenkovich says.

In the case of his client, a professor of electrical engineering earning $150,000, the Social Security Administration would withhold a total of $67,140, which meant he wouldn't get his first $1,900 monthly benefit that he otherwise would have received immediately until he turned 66.

“When they do withhold that money because of an earnings test, they don't withhold it over 12 equal checks throughout the course of the calendar year,” Brenkovich says.

Although the money is withheld in a lump sum, it isn’t returned that way.

In his client's case, the Social Security Administration would merely adjust the $1,900 monthly payment by a set amount over a period of time, Brenkovich says.

“You do get the money back, but they don't give it back to you in a lump sum. It doesn’t erase the sting of having that money withheld,” Brenkovich says.

After explaining how the earnings test worked, he was able to dissuade his client from claiming early at 64.

Brenkovich instead persuaded the client to pursue a different claiming strategy that gets the greatest mileage from Social Security.

Brenkovich recommended that when the client hit his full-retirement age at 66 he claim a survivor's benefit of $2,491 a month on his late wife’s record, rather than his own. This would allow his own lower benefit of $2,192 to grow at 8% annually.

The client -- still emotionally raw from his wife's loss two years earlier -- was unaware that he could claim a survivor's benefit.

“I think in these types of scenarios, it can be a very personal and to some degree emotional experience, and so it requires empathy, lots of listening and most of all objectivity,” Brenkovich says. “In the difficult period following the loss of a loved one, people appreciate objectivity.”

With that in mind, Brenkovich advised his client to collect survivor benefits until his 70th birthday, at which point he would switch to his own work record. By then, his Social Security benefit would be $2,894 a month, or $702 more a month than it would have been at 66.

If the client lives to 85, he will have received about $640,488 in Social Security benefits on both his late wife’s and his own work record. Had he claimed early at 64, he would have only received $478,800.

The client will need the extra income, given his good health and active lifestyle, Brenkovich says.

“There is a reasonable presumption of longevity that needs to be addressed and planned for,” Brenkovich says.

This story is part of a 30-day series on preparing for retirement. This story was originally published on Feb. 18.

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