Friday, July 4, 2008

Vacation Pay & Waiting Till 66

Question:
I am planning to retire on August 1, 2008. I am 64 yrs old and not planning to collect social security benefits for another 2 yrs. If I get paid in lieu of my unused vacation time, would it affect my social security payments?
Jitendre from New Jersey

Answer:
Unused vacation time is counted as earnings, but there are limits on this for purposes of the “retirement test.” Any payments made on account of retirement are counted as earnings in the month last worked, unless they are earned in a prior year, in which case that portion of the vacation pay attributable to the prior year does not count in the current year’s earnings for “retirement test” purposes. If you don’t plan to apply for benefits until 2010, the 2008 earnings will have no effect for the “retirement test” in 2010. If the unused vacation time is paid out to you after you retire this year, and you have accumulated so much time that it extends into 2010, it still doesn’t affect 2010 benefits.

In fact, no matter how high your 2008 earnings, you could collect reduced retirement benefits for August through December. Because your earnings in these months will be under the monthly limit of $1,130 applicable to you this year, benefits for these months cannot be withheld. These are called “non-service” months. I discuss this in Chapter 8, Social Security Benefits Handbook. Click on the link and scroll down to Section 804, The Monthly Earnings Test.

But Jitendre, your plan to wait till age 66 to collect benefits even though you are retiring now may not be in your best interest. The only reason to forego benefits now would be to get an unreduced benefit at age 66. As I have discussed in an article which was published on the Basil & Spice blog, this may not pay off for you. You may read my article that was posted on April 20, 2008. Click the title "Social Security Benefits, Now Or Later?"

You may want to reconsider passing up two years of benefits, or at least figuring out how long it will take to recover them after 66.

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