Key Takeaways:
- Claiming Social Security benefits early and continuing to work can lead to reduced benefits, with a specific annual limit.
- Understanding the temporary nature of this reduction is crucial, as benefits will no longer be reduced and may even increase once you reach Full Retirement Age (FRA).
Social Security is a vital federal program that provides financial support to millions of Americans, but many pre-retirees lack a complete understanding of how it works. There are two crucial Social Security rules that often go unnoticed by those who haven’t retired yet, and they can have a significant impact on your benefits.
1. Working After Claiming Social Security Early Can Reduce Benefits
A December 2023 report from the Social Security Advisory Board highlighted a common misunderstanding among Americans regarding the retirement earnings test. This test applies to individuals who begin collecting Social Security retirement benefits before reaching their Full Retirement Age (FRA). Surprisingly, studies have shown that between 25% and 50% of pre-retirees are unaware that continuing to work after claiming Social Security early can lead to a reduction in their benefits.
If you start receiving Social Security retirement benefits before reaching your FRA, your benefits will be reduced by $1 for every $2 you earn above an annual limit. In 2024, this limit is set at $22,320.
The rules change slightly in the year you reach your FRA. In that case, your retirement benefits will be reduced by $1 for every $3 you earn above a higher annual limit, which is $59,520 in 2024.
2. This Reduction in Benefits is Temporary
While many individuals who are aware of the retirement earnings test understand that benefits can be reduced while working, a significant percentage of them miss a crucial aspect of this rule. The Social Security Advisory Board’s report revealed that only 30% to 40% of those who know about the reduction are aware that it’s temporary.
A common issue is that many financial advisors fail to inform their clients about the temporary nature of this reduction. The report noted that some advisors describe the retirement earnings test as a tax and don’t explain to clients that the benefits withheld due to work will result in higher monthly benefits once they reach FRA.
The Social Security Administration (SSA), however, explains this process in its official publications. According to the SSA, beginning in the month you reach your FRA, your benefits will no longer be reduced, regardless of your earnings. Moreover, your benefit amount will be recalculated to provide credit for any previously withheld amounts.
It’s even possible that your benefits could increase due to your work. If your earnings while collecting Social Security before your FRA count as one of your highest 35 earning years, the SSA will automatically recalculate your benefit to include the higher earnings.
These Rules Impact Many People
The Social Security Advisory Board report referenced studies that showed a significant number of retirees born in specific years either partially retired or transitioned in and out of the workforce before fully retiring. It’s likely that these trends will continue for future generations of retirees.
The reasons behind these trends, including the need to supplement retirement income and a desire for continued engagement in work, are expected to persist. Therefore, understanding these Social Security rules can be crucial in optimizing your benefits and financial planning for retirement.
Contact Information:
Email: [email protected]
Phone: 2564383071
Bio:
Kathy Hollingsworth – Federal Employee Benefits Specialist
Originally from Birmingham, Kathy received her advanced education at Birmingham-Southern College. Kathy’s professional career began with 30 years in the media industry (radio and television), but will end serving senior citizens. As director of a senior center for five-and a half years at the largest senior center in central Alabama, Kathy has devoted her life to meeting the needs of senior citizens. Due to continuing education and working with companies that specialize in finding the best financial products, Kathy stands ready to help her clients find solutions to the problems that arise while in retirement and planning for retirement retirement.
For the last eighteen years, Kathy, a Federal Employee Benefits Specialist, has assisted in helping federal employees make wise, frugal retirement decisions.
Kathy also became a Registered Rep in 2018 (CRD 6832692) and an Investment Advisor Representative (Fiduciary) in 2021. In addition, Kathy is a licensed mortgage originator (License #212553), specializing in VA, FHA and Conventional mortgage loans.
Kathy has written many articles for the Montgomery Area Council on Aging, Montgomery Advertiser, and Alabama Gerontological Society on the subject of seniors. Kathy was the keynote speaker at Alabama’s State Capitol in Montgomery for the State Combined Campaign Salute to Seniors in 2005.
Kathy also writes articles on Federal Benefits and Insurance subjects.
A Certificate of Recognition was awarded to Kathy in 2005 by Governor Bob Riley for her service to state, family and community.
Every free moment Kathy gets is spent with her grandson Konner and two dogs, Sallie, and Sassy.
