Understanding the Impact of Claiming Social Security Early While Working

You can’t claim Social Security retirement benefits until you turn 62, but there’s no rule saying you have to be retired to do so. Many Americans choose to receive benefits while still working. For some, this allows for a higher standard of living than living solely on their paychecks. Others appreciate the flexibility of reducing their work hours while maintaining steady income.

Some individuals successfully combine work with Social Security benefits. However, for a number of workers, claiming Social Security while still employed could lead to unintended financial consequences.

Image source: Getty Images.

Hidden Costs of Early Claiming

The Social Security Administration sets a full retirement age (FRA) for each individual based on their birth year. Currently, most workers have an FRA of 67, though some may have an FRA of 66. Early application for benefits is permitted but will reduce the amount you receive monthly. Specifically, you lose 5/9 of 1% for each month claimed early for the first 36 months and 5/12 of 1% for each month thereafter. For those with an FRA of 67, this could mean losing up to 30% of their benefit if they claim as early as 62.

Importantly, early claimers who continue to work face additional reductions due to the earnings test. According to this rule, for every $2 earned above $23,400 in 2025 (if under FRA that year), $1 will be deducted from their benefits. For individuals approaching their FRA in 2025, the threshold shifts to $62,160, but even then, they will lose $1 for every $3 earned above that limit. Once an individual reaches their FRA, they will no longer incur deductions from benefits based on earnings.

Some workers may find themselves receiving no Social Security benefits due to the earnings test, which can be problematic if they relied on this extra income for expenses. However, it is essential to know that any withheld benefits are not lost permanently.

Recovering Withheld Benefits After Reaching FRA

Money withheld because of the earnings test is eventually returned in the form of a benefit adjustment upon reaching FRA. The government assesses how much was withheld and adjusts the monthly benefit accordingly. This adjustment is one-time, and after it, beneficiaries will receive this adjusted amount for the rest of their lives, along with minor increases for cost-of-living adjustments (COLAs).

While this recovery is an improvement over losing the benefits entirely, some may prefer to receive those funds earlier. By managing work income, it is possible to reduce or avoid impacts from the earnings test. Keeping track of annual income is vital, particularly if Social Security checks begin to decrease due to the earnings test, necessitating budget adjustments.

Unlocking Potential Social Security Bonuses

Many Americans are behind in their retirement savings, but discovering lesser-known “Social Security secrets” can enhance retirement income. For instance, there is a simple method that could provide up to $22,924 more each year. Understanding strategies for maximizing Social Security benefits can lead to greater confidence and security in retirement. Click here to explore these strategies further.

View the “Social Security secrets” »

The Motley Fool has a disclosure policy.

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.