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Social Security: First Year of Retirement Rule May Help

Sep 10, 2010

Question: I have just turned 62 and will get my first Social Security check in October. I actually retired several years ago, but I still do a bit of consulting. So far this year, I've made about $11,000. I know I can make $14,160 once I'm on Social Security. So, does that mean I could make $14,160 between October and December?

Answer: No, the $14,160 earnings threshold applies to a full calendar year. So, you have an additional $3,160 that you can make until you bump up against that earnings limit. And the law says that for every two dollars you make above the $14,160 threshold, one dollar must be deducted from any Social Security benefits you're due this year.

For example, let's say you end up making a total of $15,160 in 2010. That's $1,000 over the limit, so half of that, or $500, must be withheld from one of your Social Security checks.

That should be relatively simple to understand. But now I have to add a little twist in the rules. But it's a twist designed to help most people. There is another law that says in the first year you start getting Social Security checks, you are guaranteed a benefit payment in any month you earn under a monthly earnings threshold. That monthly threshold is always one-twelfth of the yearly limit -- or $1,180 in 2010 ($14,160 divided by 12 equals $1,180).

That rule probably won't come into play in your case. It's designed to help people who start their Social Security sometime during the year, but they already have made more than the earnings threshold by the time they retire. Here is an example:

Fred turned 62 and retired in July 2010. He had already made $50,000 between January and June, putting him well above the $14,160 earnings threshold. So normally, Fred might not be due any Social Security benefits in 2010, even though he retired in July.

But this is where the "first year of retirement" monthly rule comes into play. That rule says that even though Fred has made way more than the yearly earnings limit of $14,160, he can get Social Security benefits from July through December because he's not working and not making more than $1,180 per month from July on. It's important to note that compensation such as pensions and investment income doesn't count toward the earnings limits.

I can think of one scenario where this monthly rule could come into play in your situation. Let's say you don't get any consulting gigs in October or November. But then in December, you land the consulting job of your dreams and you're paid $30,000 for one month's work. You said you already made $11,000 earlier in the year; therefore, your total earnings for 2010 would be $41,000, well above the $14,160 income threshold. That would normally mean tough luck when it comes to collecting any Social Security benefits for the year. But again, that special first year monthly rule means you would be due your Social Security checks for October and November because you didn't make over $1,180 in either of those months. You'd simply have to forfeit your December check. But hey, you had that $30,000 consulting gig, so you're not complaining.

And by the way, if that actually happens, let me know what line of work you're in and I'll consider changing careers. I can assure you that a Social Security consulting job doesn't come anywhere near to that kind of remuneration!

Q: I am a 57-year-old woman who applied for disability benefits, but I was turned down because they said I didn't have enough work credits. Although I was laid off about six years ago, I do have my 40 quarters. And I have statements from several doctors that my severe case of fibromyalgia prevents me from going back to work.

Am I going to have to hire a lawyer and wait for two years like everyone else has to do in order to get the Social Security benefits that are rightfully mine?

A: You could hire 10 lawyers and have the worst case of fibromyalgia in medical history, and you still won't get Social Security disability benefits.

The law says that to qualify for disability benefits, you must have recently worked and paid Social Security taxes. Specifically, in addition to being "insured" (i.e., having the 40 quarters), you must have worked and paid Social Security taxes in five out of the last 10 years. Based on what you told me, you have worked in only four of the last 10 years.

By the way, the "five out of the last 10" rule doesn't apply to everyone. Younger people need fewer recent work credits to qualify for disability. It's a sliding scale depending on the age of the applicant. It could be four out of the last eight, three out of the last six, and so on. The minimum requirement for a very young person would be one and one-half years of work out of the last three.

The reasoning behind the recent work requirement is the premise that you get Social Security disability benefits if a disabling condition forces you to stop working. In your case, you said you were laid off six years ago. Presumably, you stopped working because of business cutbacks or economic conditions, not because of your fibromyalgia.

So, unless you can get Congress to change the law, you are never going to qualify for Social Security disability benefits. The only bit of good news I can give you is that in five years, you will be eligible for Social Security retirement benefits. You don't need recent work to qualify for retirement benefits. You simply need the 40 credits that you said you already have.


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