Understanding the Risks of Early Social Security Claims
Claiming Social Security benefits as early as possible offers a tempting advantage: you may receive more checks over time, potentially allowing for earlier retirement than if you relied solely on savings. However, there are notable challenges associated with applying early for these benefits.
Applying at age 62 can lead to a reduction of your monthly checks by up to 30%. Additionally, it may expose you to the risks associated with a lesser-known Social Security rule that could further diminish your benefits.
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Working While Claiming Social Security: What to Know
In 2023, about one-quarter of applicants choose to claim Social Security at the earliest age of 62. However, many Americans opt to work longer, and it is indeed possible to receive benefits while employed.
If you decide to work while claiming benefits, be aware of the earnings test. This rule stipulates that if your income exceeds certain limits, a portion of your Social Security checks may be withheld. For instance, in 2025, those under their Full Retirement Age (FRA) could lose $1 from benefits for every $2 earned over $23,400. Most current workers have an FRA of 67, though some older retirees might have an FRA as young as 66.
Once you reach your FRA in 2025, the penalty lessens considerably, with only a $1 reduction for every $3 earned above $62,160, but only on income prior to reaching FRA.
It’s important to note that some individuals on Social Security—especially those with higher earnings—might experience months where they receive no benefits at all due to the earnings test. This situation can be disheartening, particularly when you rely on these checks for bills. However, there is a silver lining.
Upon reaching your FRA, the government will cease withholding from your checks based on the earnings test, regardless of your earnings. Additionally, your benefits could be adjusted upward to compensate for any previously withheld amounts. For those with significant withholdings in past years, the adjustment can be large.
Strategies to Minimize the Earnings Test Impact
Receiving increased benefits after reaching FRA can be advantageous. However, this does not equate to receiving the amount you would have gained had you delayed your application until FRA. Early claims decrease your monthly benefit size, with greater reductions occurring the sooner you claim.
If you’re not yet claiming Social Security and don’t require the funds immediately, waiting until retirement or reaching your FRA could be beneficial. This approach would eliminate early claiming penalties and alleviate concerns regarding the earnings test.
For those eager to claim benefits sooner, consider decreasing work hours to lower your income. This may allow you to transition gradually toward retirement. With earnings kept under $23,400, you can avoid reductions from the earnings test.
Unfortunately, some might find it impossible to evade the earnings test entirely. Yet, the worst-case scenario is still manageable, as you will recoup withheld funds once reaching your FRA. Moreover, the limits of the earnings test typically increase each year, meaning that withheld amounts this year may not occur in future years.
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