Many important financial decisions must be made to prepare for retirement, including when to claim Social Security benefits. Some people plan to claim benefits whenever they're finished working, but that's not always the case. Just because you claim Social Security benefits doesn't mean you have to stop working or earning money.
Many people claim benefits at 62 or soon after and work well past that age. However, claiming benefits before your full retirement age and working does mean you need to monitor how much you make, or your monthly payout could be reduced.
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The role of your full retirement age
Your full retirement age is when you can receive your full monthly Social Security benefit. It's based on your birth year and is used to calculate your monthly benefit if you decide to claim before or after your full retirement age.
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Claiming Social Security before your full retirement age will reduce your monthly benefit. The exact amount depends on how far away you are from your full retirement age.
Benefits are reduced by five-ninths of 1% (0.5556%) monthly if you're within 36 months of your full retirement age. Every additional month reduces it by five-twelfths of 1% (0.4167%). People whose full retirement age is 67 and claim benefits at 62 will have them reduced by 30%.
How working while claiming benefits early works
Social Security uses a Retirement Earnings Test (RET), which applies to people who claim benefits before their full retirement age and continue to have earned income. For 2024, the most you can earn while claiming Social Security benefits early is $22,320 without being subject to the test. If you'll reach your full retirement age in 2024, the most you can earn in the months leading up to it is $59,520.
If you don't reach your full retirement age in 2024, your benefits will be reduced by $1 for every $2 you earn over the limit. If you do reach it, benefits will be reduced by $1 for every $3 over you are.
The RET threshold typically changes annually, so it's important to keep up with your earnings respective to it every year.
Earning over the limit can also affect spousal benefits since they're based on the primary person's benefit. Imagine Person A's (primary) monthly benefit is $1,500 and Person B's (spouse) is $750. If Person A earned $6,000 above the limit, their benefits would've been reduced by $3,000 annually, or $250 monthly. Since Person B's benefit is based on Person A's benefit, their benefit will be recalculated from Person A's new $1,250 monthly benefit.
Your money isn't taken away permanently
Luckily, when Social Security reduces your payment for crossing the RET threshold, it doesn't keep it permanently. The money is withheld until you reach your full retirement age, and then your monthly benefit is recalculated upward. The effect is to gradually add the money back over time.
Social Security has no fixed payback time to return the withheld amount. It'll vary based on how much is withheld, life expectancy, and similar factors. In the end, you could end up receiving more or less than what was taken out of your Social Security checks.
Even with the potential to have some benefits taken away, though, you shouldn't let the RET stop you from working if you want. If work brings you fulfillment, financial stability, or a way to stay active, you should do it. What's most important is understanding how your benefits will be affected so you can adjust your retirement income strategy accordingly.
