Five Key Issues in Retirement Planning

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SEPTEMBER 2005 - Normal” retirement age. “Retirement” is when most workers apply for regular, monthly Social Security retirement benefit payments. Until the end of 1999, the “normal” age to begin receiving full Social Security retirement benefits was 65. In January 2000, however, the Social Security Administration began the long-planned phase-in of a higher “normal” retirement age. The age increase is to be accomplished gradually, over a 22-year period:


Workers born:
Full benefits at:
1937 and earlier 65 years
1938 65 years, 2 months
1939 65 years, 4 months
1940 65 years, 6 months
1941 65 years, 8 months
1942 65 years, 10 months
1943 to 1954 66 years
1955 66 years, 2 months
1956 66 years, 4 months
1957 66 years, 6 months
1958 66 years, 8 months
1959 66 years, 10 months
1960 and later 67 years

This change in “normal” retirement age affects only Social Security retirement benefits, not eligibility for Medicare benefits, which continue to begin at age 65.

“Early” retirement. Workers cannot receive Social Security retirement benefits until they reach age 62. Workers who file for early retirement benefits at ages 62, 63, or 64 will receive a reduced benefit. For example, workers who retired at exactly age 62 in 1999 received only 80% of the amount they would have received had they waited until normal retirement age (65 at that time). The benefit amount stays at this reduced level even after the individual reaches their applicable normal retirement age.

For workers born in 1938 or later subject to the advancing “normal” retirement age noted above, benefits will be reduced even more if they retire early. When the phase-in to a normal retirement age of 67 is complete workers retiring early at age 62 will only receive 70% of their full benefit.

Repeal of the retirement earnings test. Suppose a worker retires at full retirement age and begins receiving Social Security retirement benefits, but then starts working at another job (part- or full-time). Before year 2000, that could have caused a reduction in retirement benefits. Specifically, working seniors between the ages of 65 and 69 lost $1 of benefits for every $3 of earnings above a minimum threshold ($17,000 in 2000; there was no earnings test for retirees 70 and over). On April 7, 2000, however, President Clinton signed a law that eliminated the Social Security earnings test for working seniors between the ages of 65 and 69, retroactive to January 1, 2000.

The earnings test also applies to individuals that retire early. In addition, employees that return to the workforce after they have begun collecting Social Security benefits are subject to withholding for Social Security and Medicare taxes on their retirement wages, just like all other employees.

Delaying retirement. Individual benefit amounts vary depending on the worker’s lifetime earnings covered by Social Security. As noted, if a worker decides to retire early, those benefits will be reduced. The opposite is also true; by delaying retirement, an individual will receive a higher benefit amount than if she had retired at age 65 (or the applicable normal retirement age).

Under Social Security rules, an individual’s benefit is increased by a certain percentage each year that she delays ending work and claiming benefits. There is no boost in benefits for years worked past age 70. The credit gradually increases (based on the individual’s date of birth) to a rate of 8% per extra year worked for the youngest employees who take later retirement:

Workers born:
Benefits boost of:
1943 and later

Taxability of benefits. When a Social Security recipient has income in addition to Social Security benefits, the benefits may be subject to income tax. The higher an individual’s other income, the higher the tax on Social Security benefits.

The precise amount of taxable Social Security benefits depends on the amount of the other income and the amount of benefits. For these purposes “other income” is adjusted gross income (wages, pension, dividends, and taxable interest, minus IRA contributions) plus tax-exempt interest. The income tax calculation is progressive. Some workers may not have to pay income tax on any of their benefits, and no one has to pay tax on all of her benefits.

Reprinted with permission from the May 2005 issue of ADP Tax Researcher.




















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