If you have a government pension and a Social Security benefit, your Social Security benefit may be reduced by both the Windfall Elimination Provision (WEP) which impacts your own Social Security benefit or the Government Pension Offset (GPO) which impacts your Social Security spousal benefit.
What is not generally known is that both these reductions are calculated based on the amount of government pension ACTUALLY BEING RECEIVED CURRENTLY.
What is means is that for some with the right circumstances, they can maximize their Social Security by turning it on BEFORE THEY BEGIN RECEIVING THEIR GOVERNMENT PENSION.
NON OPTIMIZED STRATEGY EXAMPLE:
Maggie is a teacher age 65 who plans to work until she is 70. Her own teacher pension (STRS) would reduce her own Social Security benefit and eliminate her Social Security spousal benefit (GPO) that she may have been eligible for from the work she did before she became a teacher.
Her husband, Pete, is currently receiving his Social Security benefit of $2,000 per month.
If she retires at 70 and begins her STRS pension, she have lose all or most of her potential Social Security benefits to the WEP and GPO.
OPTIMIZED STRATEGY EXAMPLE:
Assume the same circumstances as above.
Between Maggie’s Full Retirement Age (currently 66) and 70 while she is still working, she could activate her Social Security Spousal Benefit. This would be 50% of her husband, Pete’s Social Security benefit (at his full retirement age). In this example, we’ll assume it is $1,000/mo (50% of $2,000).
During the four year time period between Maggie’s age 66-70, she’ll collect $1,000/mo plus cost of living increases for a total additional benefit of $48,00*. She can use the after tax amount of the benefit to increase her retirement contributions, pay down her mortgage, take vacations, help kids or grandkids, etc.
What is the takeaway for those who may be impacted by the WEP or GPO? If there is a window of time between when you could begin a Social Security benefit and the age you begin a government pension that will reduce this Social Security benefit, turn the Social Security benefit on early to get as much of it as possible.
Optimally, you will want to turn the Social Security benefit on after full retirement age and before the government pension. This is because work income before full retirement age may significantly reduce your Social Security benefit.
I’m not saying that you should unnecessarily delay beginning your government pension. But if you are planning to delay it, this could give you some extra dollars.
*Although the $1,000/mo will not be reduced due to Maggie’s work income after her Full Retirement Age, it will be subject to potential income taxation at the federal level
If you have any questions please feel free to contact me.