Did you know that your social security benefits can be reduced? They can be under two circumstances: Early Retirement Reduction and the Earnings Limitation Test.
If you begin to receive payments at your Full Retirement Age (FRA), you can get the full amount of your Social Security Benefit. For anyone born in 1960 or later, FRA is 67. For those born in 1959, FRA is 66 and 10 months; for those born in 1958, FRA is 66 and 8 months; and for those born in 1957, FRA is 66 and 6 months. Anyone born in 1956 or earlier has already passed their FRA. However, if you choose to take your Social Security benefit before your FRA, your benefit is permanently reduced! For example, if your FRA is 67 and you start taking benefits at age 62, the overall reduction is 30%. This is the Early Retirement Reduction.
You may take your benefit as early as age 62, but if you start taking benefits before the year after you reach your FRA, you will be subject to a reduction in your benefits if you have earnings above a certain limit. This is the Earnings Limitation Test. For 2023, that limit is $21,240; for 2024, that limit is $22,320. In the year you hit FRA, the reduction is one-third of the amount of earnings above the limit. For 2023, that limit is $56,520; for 2024, that limit is $59,520. The calculation is not covered here, but should be fully explored before making any decisions.
There is also a special rule that applies if you retire before FRA. In the year of retirement, you can get a full Social Security check for any whole month you are retired even if the Earnings Limitation Test would have applied. For purposes of this rule, someone younger than FRA is considered retired if they earn less than $1,770 per month in 2023.
It is important to note that the Early Retirement Reduction is a permanent reduction. However, benefits lost from the Earnings Limitation Test begin to be restored starting at FRA. The monthly benefit is recomputed actuarially to reflect the number of months you received less than a full benefit as a result of the ELT. You still do receive the lower Early Retirement Reduction on this piece of the benefit as well.
Conversely, if you retire between FRA and age 70, you earn a delayed retirement credit equal to 8% times the number of years past your FRA. For example, if your FRA is 67 and you begin receiving benefits at age 70, your benefits are increased by 24%. This is a permanent increase in your benefit, and it is in addition to any cost of living adjustments.
Of course, when to collect your Social Security payment depends on each individual situation, ignoring disability (which could allow you to collect benefits earlier). Again, exactly when to collect and the relevant tax consequences depends on your personal financial plan. Please let us know if we may be of assistance.