Pre-Retirement Pit Stop: Downshifting

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Financial planners have been using a new term in the past few years: "downshifting." It’s an intermediate step between working full time and all-out retirement. You scale back your work hours, or take a new job, but only part time.

Before taking this step, it’s important to consider how it can slash Social Security benefits.

Originally, downshifting mainly referred to people who just weren’t ready for the golf course or rocking chair. But after the financial turmoil of the past couple of years, many people are forced to downshift rather than retire, because they just can’t afford to quit entirely.

The Social Security system is designed to encourage people to postpone the start of benefits until they reach full retirement age, which varies from 65 to 67, depending on when you were born.

If you were born between 1943 and 1954, your full retirement age is 66. Choose to start Social Security at 62 and your monthly check will be 25% smaller. You might get $750 instead of $1,000, for example. In effect, the benefit is seen as a lump sum to be distributed over your expected lifetime. Start earlier and you’ll get a smaller amount each month, but you’ll get it for more months.

Another adjustment is made for people who start benefits before their full retirement age but continue working. A person younger than retirement age for the full year can earn up to $14,160 with no effect on the benefit. But the benefit is reduced by $1 for every $2 earned above that limit.

In the year you reach full retirement age, you can earn up to $37,680 in the months before your birthday with no effect on the benefit, but the benefit is reduced by $1 for every $3 earned above that limit.

Once you reach full retirement age, there is no benefit reduction no matter how much you earn.

Keep in mind, though, that Social Security benefits can be taxable if you earn enough. If you make enough to live on from other sources, it will probably make sense to postpone the start of benefits. In fact, you can get a bigger benefit by waiting. The person entitled to $1,000 a month at full retirement age of 66 would get $1,320 by waiting to 70.

Reductions for earnings prior to full retirement age are really postponements rather than penalties. Once you reach full retirement age, the reductions are, in effect, added to the total you are entitled to receive, so that money comes to you gradually over your expected lifetime.

Income that can affect benefits is limited to wages from a job, or profits if you are self-employed. Pensions, annuities, investment income and interest earnings will have no effect on your Social Security payment.

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