Ask Carrie by Carrie Schwab Pomerantz

Dear Carrie: I am planning to start collecting Social Security at age 66, since I fall in the age group from 1943 to 1954. Will I still be able to work without restrictions on the income I make even though I am receiving Social Security benefit payments? If I understand it correctly, there is no cap to my earnings at that point. Is that correct? — A Reader

Dear Reader: Thanks for your question — it raises a number of important issues for the millions of Americans who are approaching retirement. And for the benefit of other readers, let me start by explaining that the age you're talking about (in your case, 66) is what the Social Security Administration refers to as your "full retirement age" (FRA). Once we all reach our FRA (and that will vary according to the year in which we were born), earned income — no matter how high — will no longer reduce our Social Security benefits. But let's take a slightly broader view of how timing and earnings can impact your Social Security benefits.

First, just to be clear: You are free to earn as much as you like at any time during your retirement. So in that sense there is no "cap on earnings." But if you take Social Security benefits before you reach your FRA, you'll pay what can be a fairly hefty penalty for earning money above a certain threshold.

In 2009, if you are a Social Security recipient and have not yet reached your FRA, you can earn up to $14,160 with no impact on benefits. But above that modest amount, you'll lose $1 in benefits for every $2 earned. Then, in the year you reach your FRA, you can earn up to $37,680 (again, this is for 2009) free and clear, but your benefits will be reduced by $1 for every $3 you earn above that limit until you reach the actual month of your birthday. After your birthday (when you've reached your FRA), obviously, you can earn as much as you like without seeing your benefits reduced.

Another consideration is taxation of benefits. Regardless of when you retire, up to 85 percent of your Social Security benefit may be taxable if your IRS-defined modified adjusted gross income (MAGI) reaches a certain level.

So be prepared for that if you're making a fair amount of money during your retirement. Your tax advisor can help, or refer to IRS Publication 915, "Social Security and Equivalent Railroad Retirement Benefits."

In many ways, however, the larger issue for Social Security recipients is not how much they earn, but when they start to take benefits. Start early (the youngest age is 62), and benefits will be permanently reduced by up to 25 percent! On the flip side, waiting past FRA to start receiving benefits can result in a substantially larger monthly check. For example, if someone born in 1943 postpones benefits past their FRA, their monthly benefit will increase by 8 percent per year — until the age of 70. After age 70 benefits top out.

So what does this mean in practical terms? Many people, especially those who live a long time, would receive more money over time by postponing benefits — certainly to their FRA and possibly up to age 70. (Sadly, though, this is relatively uncommon: According to government statistics more than 70 percent of those receiving Social Security began doing so at age 62.) Of course there is no "right" answer for everyone, and personal circumstances will dictate the optimal time (if you need the money, you need the money!). But for many others, waiting is a better alternative, particularly if they're working and capable of supporting themselves with earned income or money from other sources. The "break-even" calculator at www.ssa.gov is a great tool for analyzing the choices.

As more and more of the boomer generation approach retirement, questions like yours are increasingly common — and important. After all, the choices you make today will reverberate for, quite literally, the rest of your life.

Note: The Social Security Administration has lots of useful information to help you make decisions, including a number of simple calculators, which can be found at http://ssa.gov/planners/morecalculators.htm.

Carrie Schwab-Pomerantz, CERTIFIED FINANCIAL PLANNER (tm) is president of the Charles Schwab Foundation and author of "It Pays to Talk." You can e-mail Carrie at askcarrie@schwab.com. This column is no substitute for an individualized recommendation, tax or personalized investment advice. To find out more about Carrie Schwab-Pomerantz and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.

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