Personal finance Topic #101 - How NOT to reduce your Social Security benefits

If you apply for Social Security benefits early, you'll be asked whether you plan to keep working and, if so, how much you expect to make-to determine whether you'll be stung by the earnings test. For 2009, the test applies if you make more than $14,160 if you are before full retirement age (FRA). And for every $2 you earn over that limit, you'll lose $1 of benefits.

Suppose you claim benefits at age 62 and your monthly benefit is $1,500 (and you estimate that you'll earn $30,000 during the year). Because $30,000 is $15,840 over the limit, you would lose half of the excess, or $7,920, in benefits.

In the year you first claim benefits, the test basically lets you ignore money you made before you applied and squeezes benefits based on monthly earnings for the rest of the year. In the year you reach your FRA, a more lenient earnings test applies: You lose $1 for every $3 in earnings over $37,680 before your birthday. Starting in the month you reach normal retirement age, there's no earnings test. You can earn as much as you want without losing a dime in benefits.

If you are within 12 months of your FRA and your monthly benefit is $1,800 (and you estimate that you'll earn $45,000 during the year). Because $45,000 is $7,320 over the limit, you would lose a third of the excess, or $2,440, in benefits.

If you are at FRA (between 66 and 67), your benefit is untouched, no matter what you earn.

So my advice to you is - just wait until you reach FRA, or keep your earning below $14,160 or $37,680, depending on your age.

In my own case, I will collect 40% more in monthly Social Security benefit if I wait until FRA of 66 (plus COLA) compared at 62. If I wait until 70, I can collect 93% more (plus COLA) each month compared at age 62.