The Drawbacks of Early Social Security Benefits

Many people jump to the opportunity of taking their social security benefit the second that they are eligible. While we all have free will and can do as we please it is important to not rush to make this decision as it can have a life-long impact on your finances. Below we explore the two most common penalties.

Retirement Benefit Adjustments

The average age for claiming Social Security retirement benefits has gradually increased. Many individuals begin receiving benefits before reaching full retirement age (FRA), typically set at 67 years old. Opting for early benefits incurs permanent reductions. Specifically, for up to 36 months before FRA, there’s a 6.67% reduction per year, followed by an additional 5% reduction per year thereafter. Conversely, delaying benefits past FRA leads to increases of 8% per year until age 70.

Although delaying benefits can enhance overall income due to longer life expectancies, there are valid reasons for early claiming, such as health concerns that prevent individuals from working until FRA.

Income Penalty (Earnings Test)

Claiming Social Security early while continuing to work can result in penalties. The retirement earnings test (RET) applies, imposing limits on annual earnings before FRA:

  • Individuals reaching FRA after 2024 can earn up to $22,320 annually without penalty. Beyond this threshold, $1 is withheld for every $2 earned.
  • For those reaching FRA during 2024, the threshold is $59,520 annually, with $1 withheld for every $3 earned above it for months before the birth month.

Essentially, in 2024 if your monthly Social Security benefit was $2,000, it would’ve been completely wiped out if you earned more than $70,320 in the year.

Understanding the RET is essential. The Social Security Administration (SSA) withholds benefits based on estimated earnings, returning any excess amounts after the year ends. Notably, only earned income is considered, while retirement income like pensions or 401(k) distributions does not count.

Despite benefits being withheld, they’re not permanently lost. Once individuals reach FRA, benefits are adjusted upward to account for the withheld amounts. In fact, the SSA suggests that most beneficiaries affected by the earnings test ultimately recoup the withheld benefits.