Most Pre-Retirees Don't Understand Social Security Earnings Test

Each year, we have at least a few clients who want to collect Social Security benefits as soon as possible (at age 62) while continuing to work.

Some even rely on this strategy to enjoy their pre-retirement years by planning to spend the “extra” Social Security income on travel and other discretionary expenses.

We often assume that people understand basic aspects of how things like Social Security work.

But new research suggests that might not be true.

Between 20% to 50% of pre-retirees don’t know that their monthly benefits might be lowered if they continue to work after claiming Social Security.

And of those who are aware that their benefits will be reduced, only 30%to 40% know those reductions will eventually be added back to their benefits when they reach their full retirement age (FRA, between 66 and 67).

So how does the Retirement Earnings Test work?

If a beneficiary is under their FRA and continues to work, their benefits may be reduced by $1 for every $2 they earn in excess of $21,240.

In 2024, this number will be increased to $22,320.

And once an individual reaches FRA, $1 is deducted for every $3 earned in excess of $56,520 (increasing to $59,520 in 2024).

The problem is that many people might actually work less if they knew that this rule existed – keeping their income under that threshold.

And while the Social Security Administration's policy calls for all field office staff to discuss the retirement earnings test with applicants to whom the rule applies, it rarely gets communicated.

In short, if you plan to remain gainfully employed between ages 62 and 66/67, collecting Social Security benefits is not likely the best strategy for you.