Start Social Security Early? It Still Pays to Work
The confusing Retirement Earnings Test actually repays you later
If you’re in your early 60s and the COVID recession has delivered a layoff or reduced work, it’s perfectly logical to consider starting Social Security sooner than later. You can start at 62.
But even if you feel it necessary to start collecting Social Security — thereby locking in a lower benefit than if you delayed — you should still aim to get back to work. At the very least, part-time. Yet many people who start receiving Social Security instead stop working, often from a misguided notion that they will forfeit some of their benefit if they work.
It’s perfectly reasonable to be confused. Social Security’s own convoluted rule, called the Retirement Earnings Test (RET) can give the mistaken impression it’s best not to have earned income. Let’s sort it out.
To be very clear: Waiting as long as possible to start collecting should always be considered. The guaranteed increased payments for delaying between age 62 and age 70 represent the most attractive retirement move available, unless you have a health condition you expect will lead to a shorter life.
The Social Security Retirement Earnings Test has three parts to it, all revolving around your full retirement age (FRA). That’s the wonky term for when you are entitled to 100% of your benefit. For anyone who has yet to start Social Security, their FRA is somewhere between age 66 and 67. You can find your exact FRA through a search of SSA.gov FRA.
Retirement Earnings Test before you reach your FRA. From age 62 until the calendar year in which you will reach your FRA, you can keep 100% of the benefits you’re collecting as long as your earned income is below an annual limit. For 2021, that limit is $18,960 per person.
Each dollar you earn above the limit will indeed reduce your immediate benefit. The rule is that for every $2 of earnings above the limit, your Social Security benefit will have $1 withheld.
That word “withheld” is insanely important. This isn’t a permanent penalty or forfeiture. You aren’t forever losing the money. It’s a temporary reduction in your Social Security check. Once you hit your FRA, without you having to lift a finger, Social Security will adjust your benefit to pay you back for the withheld amount.
At a minimum, seeking out part-time work that brings in no more than $18,960 is going to be a big win, as there is no temporary withholding in play. You can collect the Social Security benefit you’re entitled to without any earnings test withholding.
If you decide you need to start Social Security earlier because of the current poor job market, knowing the RET withholding is temporary can also shore up your long-term financial security. If in the near future you have the opportunity to find work that will pay you more than the annual earnings test limit, you shouldn’t hesitate to take it. That withheld money will come back to you once you hit your FRA. And in the meantime you are earning more income that can likely go to plenty of good uses.
Moreover, work can be such a psychological boost. Studies have shown that people who continue to work a bit in retirement tend to be happier — and often healthier.
Earnings test in the calendar year you reach your FRA. If you’ve decided to collect Social Security early, the earnings test loosens up a lot in the calendar year you hit your FRA. Someone who will reach their FRA in 2021 and has already begun to collect Social Security will be able to earn $50,520 from work without having one penny of their Social Security benefit withheld.
If you’re earning above that limit and hitting your FRA in 2021, the RET rule is that for every $3 above the limit, you will have $1 withheld from your benefit. Again, once you hit your FRA, your benefit is automatically adjusted to essentially return the withheld amount to you.
Earnings test after you reach your FRA. There is none. Once you reach your FRA, the test disappears. Whatever you earn will have zero impact on your benefit. If you find yourself in average health in your mid 60s, the actuarial stat keepers tell us there’s a 50 percent chance you will still be alive at 85 (men) or 88 (women). That might be an argument for continuing to work more.
Not necessarily to save more, but to reduce what you need to pull out of your retirement accounts in your 60s. Every year you reduce or eliminate withdrawals means more money will be left for a later-life you.