What Is the Social Security Leveling Option?

by Tim Plaehn Google
A pension level-up option may allow you to afford an early retirement.

A pension level-up option may allow you to afford an early retirement.

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A Social Security leveling option is a feature offered by pension plans to level out the income of someone who retires early. The leveling applies to the amount of pension payments and not to the amount of Social Security you will receive. If your employer offers a Social Security level option, it may be easier to take an early retirement.

Social Security Retirement

For anyone born after 1942, the Social Security retirement age is between 66 and 67 -- depending on year of birth -- to collect full retirement benefits. You can retire as young as age 62 and received a reduced Social Security retirement check -- reduced forever. If you want to retire before age 62, you must depend on other sources of income, such your employer-provided pension plan, retirement savings or other investments.

Level-Up Options

To provide a level income to an employee who retires before age 62, some employers offer the choice of a "level up" or level-income benefit, so that the amount of retirement income is the same before and after the retiree becomes eligible for Social Security. If this option is chosen by an early retiree, he receives a larger monthly pension check until Social Security kicks in, and then the pension check is reduced by the estimated amount of the monthly Social Security benefit.

How Level Up Works

For example, say you are planning for an early retirement, and your initial pension payment would be $2,000 per month. In a couple of years when you turn 62, you will start receiving $1,000 per month from Social Security for a total retirement income of $3,000 at that time. If you take a level-up option, your initial pension amount would be increased to $2,500 and then reduced to $1,500 when you can start to receive the $1,000 from Social Security. The level up keeps your retirement income at a steady $2,500 per month instead of starting your retirement earning $2,000 and then jumping to $3,000 per month when you start to receive Social Security.

Considerations

It is typical for the retirement plan administrator to require an official benefits estimate from the Social Security Administration to determine your pension amount for a level-income options. Whether the option makes sense depends on how early you are retiring compared to how much money you give up in long-term pension payments. Social Security has cost-of-living increases, and your pension may also, which could also affect the long term results. As one state pension plan notes, the level income option is just that -- an option -- and you should set up your pension plan based on your financial situation.

About the Author

Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.

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