The Social Security Earnings Rule That Trips Up Almost Every New Retiree

Many Americans claim Social Security at age 62 because it is the earliest eligibility point. Benefits are reduced until full retirement age, but earlier payments can still be valuable for some retirees. Full retirement age is 67 for people born in 1960 or later, so claiming at 62 provides up to five additional years of benefits. Working while receiving benefits before full retirement age triggers an earnings test, which can cause benefits to be withheld if earnings exceed annual thresholds. The withholding rate depends on whether full retirement age will be reached during the year. Withheld benefits are not permanently lost; benefits are recalculated after full retirement age.

"Many older Americans rush to claim Social Security benefits at age 62 because it's the earliest point you're allowed to sign up. And even though you won't get your monthly benefits without a reduction until full retirement age (FRA) arrives, for many seniors, it's worth collecting smaller benefits if it means getting that money many years sooner."

"FRA for people born in 1960 or later is 67. So if you file for Social Security as early as possible, you can enjoy five more years of benefits, which may be worth the tradeoff of smaller checks."

"The Social Security Administration (SSA) allows beneficiaries to work. And once you've reached FRA, you can earn any amount of money without a negative impact on your benefits. In fact, in that situation, working could have a positive impact on your benefits. If you keep working full-time and make a nice salary, those earnings will get added to your wage history and could lead to larger retirement checks."

"But if you work while receiving Social Security and you have not yet reached FRA, you'll be subject to an earnings test. And you should know that earning too much means having benefits withheld. The earnings test limits change every year. But the formula is pretty straightforward: If you won't reach FRA at any point this year, you'll have $1 in Social Security withheld per $2 in earnings above $24,480. If you will reach FRA at any point this year, you'll have $1 in Social Security withheld per $3 in earnings above $65,160."

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