fyi50+: Economic times being what they are, many workers might be interested in taking their Social Security benefits before they retire. Picking up $2,500 to $3,000 monthly in addition to their working income sounds interesting and appealing. This money could be used to pay down debt, go on a nice vacation, or help the grandchildren with some of their extra expenses like camp or music lessons. I asked Dave Freitag about the pros and cons of taking those Social Security Benefits early before you retire.
Freitag: Workers are frequently attracted to the idea of taking their benefits early. The window for taking Social Security benefits for most people opens at age 62 and closes at age 70. However, there are actuarial discounts to the benefit payments that last for a lifetime which are a con to taking your benefits before your full retirement age. For most workers today, the definition of full retirement age is 67. For example, if your full retirement age benefits at 67 are $1,000 a month, the discounted benefits for starting at age 62 will be reduced to $700 monthly. The thinking here is that the money is paid longer, reducing the benefits.
fyi50+: Someone looking for extra income at age 62 might not mind this $300-a-month reduction in benefits. Adding the new $700-a-month income could really help balance the budget, seeing this as a pro.
Freitag: That is true. However, this is short-term thinking because the $300 a month discount will last for a lifetime, and $300 a month adjusted for cost-of-living increases for the next 25 to 30 years adds up to a major reduction in income.
Yet there is another problem with taking benefits before your full retirement age, and that is the “earnings test.”
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fyi50+: The “earnings test” sounds like a problem. How does that work?
Freitag: Regular Social Security benefits are subject to this earnings test before your full retirement age. In 2024, the trigger point for the test is any earned income over $22,320. Benefits will be withheld if you are still working for wages and make more than this number. For every $2 earned over the test point, one dollar of benefits is not paid out to the worker.
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fyi50+: What happens to the “withheld” benefits?
Freitag: Here is the good news. At full retirement age, the withheld benefits are gradually repaid back to the worker over their lifetime. Here is the bad news. They are not paid in a lump sum at full retirement age. If you live to life expectancy, then all withheld dollars are paid.
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fyi50+: What happens if you start taking your Social Security benefits early during the year of your full retirement age?
Freitag: The earnings test threshold goes up from $22,300 to $59,520. In addition, the $2 earned over the test point is increased to $3. You can make more money in your full retirement age year before the earnings test becomes problematic.
Here is more good news. At full retirement age, the earnings test is no longer applied to any distribution of benefits. An excellent booklet is available on ssa.gov. Search for “Exempts Amounts Under the Earnings Tests” for more information and examples.
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fyi50+: Does all of your income count against the earnings test?
Freitag: Thankfully, no. Just earned income. Things like pension plan payments, capital gains, distributions from traditional IRA accounts, and interest income are not counted for the earnings test.
Basically, the earnings test effectively blocks workers from taking Social Security distributions early if they are still working before full retirement age. So, using Social Security as a source of bonus income before retirement or your full retirement age is a strategy that, as they say in Texas, “does not hunt!”
