Dear Retirement Adviser,
My wife turns 62 in a little more than three years, and we're considering whether she should begin drawing her Social Security benefits at that time. I will then be 58. In the following year, our daughter turns 18 and will be in her senior year of high school.
We fear our daughter would be eligible for Social Security benefits for less than a year. Our plan is for my wife to cut back to part-time work at the same time, which would give her annual income, excluding Social Security, of about $15,000.
I am having trouble figuring out how my income affects the situation, along with any other possible consequences. My sense is that my own projected Social Security benefits will be a little higher. Can you help?
-- Larry Layout
There are two primary issues. Since your wife will still be working, although part time, then that income could reduce her benefits since she will be shy of her full retirement age. The second primary issue is the taxability of the benefits based on your joint income, assuming you file your income tax returns jointly.
Taxpayers filing jointly with combined incomes of between $32,000 and $44,000 may have to pay income tax on up to 50% of their Social Security benefit income. If you earn more than $44,000, then up to 85% of Social Security benefits may be subject to taxation. If you and your wife file separately, then your likely tax bill only goes higher.
If your wife is below her full retirement age for the entire year, then her benefits are reduced if she earns more than a certain annual limit. In 2013, that limit is $15,120. Because the limit is indexed each year for inflation, the limit should be higher in your target year of 2015. If she plans to cut back to part-time work and earn about $15,000 annually, then she shouldn't face reduced benefits because of her work income.
If she starts receiving benefits in August 2015 when she turns 62, she'll be retired for only part of that tax year. There's a special rule that applies in this case. That rule is that the Social Security Administration cannot deduct excess earnings from any whole month that it considers her retired, regardless of her yearly earnings.
Your daughter, presuming she's not disabled, can receive benefits based on your wife's work record until age 18, or until she graduates from high school. A secondary school student can receive benefits until she graduates from high school, or two months after she turns 19, whichever comes first. Since your daughter turns 18 in the spring of her senior year, she would continue receiving benefits until high school graduation. If she works, then she's subject to an earnings limit, which in 2013 is $15,120 before she faces reduced benefits based on her income.
Ensuring that your child is eligible for Social Security benefits is one justification for your wife to take her benefits early. But as you say, in your daughter's case that would be for a little less than a year's worth of benefits to her. For your daughter to get that benefit, your wife would need to permanently reduce her retirement benefits by 25% versus waiting to file at her full retirement age. It's not a trade-off I would make. But I understand that your wife may have her own feelings about working.