It is important to be mindful of the Retirement Earnings Test (RET) if you decide to take Social Security before your full retirement age (FRA). We commonly see people take Social Security early, become bored in retirement, and then go back to work part-time or full-time. In this less-than-ideal scenario, you will have taken Social Security at a lower amount and now receive a heavily reduced benefit amount or none at all.
If you haven’t seen our article on when to take Social Security, you can find it here: The Social Security Myth – Should You Take Right Away or Delay?
RET Based on Earned Income
RET is based on earned income. Earned income qualifies as wages from an employer and does NOT include investment earnings, retirement withdrawals, government benefits, interest or capital gains.
Earnings Test and Working
If you take Social Security before your FRA and exceed the income threshold, you could potentially receive none of the benefit and in some instances never recoup all the benefits SSA withheld.
If you are below your FRA, there is a $1 reduction for every $2 of earned income above $21,240. In the year a person is reaching their FRA, there is a $1 reduction for every $3 earned income above $56,520.
An easy rule: if you are working and earning above $21,000, then you should delay taking Social Security. Once you hit your FRA, then you no longer need to worry about the earnings test and can earn any amount above the limit without seeing a reduction in your monthly benefit.
What Happens to the Lost Benefits? Do You Get Them Back?
You will not get all your forfeited benefits back in a lump sum at full retirement age. Social Security will increase your benefits for the remainder of your life when you reach FRA. Benefits withheld while you continue to work are not lost; they are added to your monthly benefit once you reach FRA.
If you were to take Social Security at age 62, you would receive around a 30% reduction in your benefits. Let’s say you forfeited 1 years’ worth of benefits – Social Security would increase your monthly benefit at your FRA. Your FRA amount would now be reduced by only 25% instead of the original 30% reduction. Ultimately, you would receive some of that money back and even come out ahead if you were to live long enough.
The illustration below shows how the RET will reduce the initial benefit during working years and then increase the benefit amount after FRA.
Be Careful of Receiving More in Benefits Than You Should
If you decide to take early benefits, be careful that SSA is not paying more than what you are entitled to. You will want to call SSA to give an income estimate in order to prevent being paid more benefits than what you are owed. Eventually, SSA will request the overpayment be given back.
Average Benefit Claiming Age of 64
With a majority of people taking before their FRA there needs to be more education around RET.
Reach Out to Us!
If you have additional federal benefit questions, contact our team of CERTIFIED FINANCIAL PLANNER™ (CFP®) and Chartered Federal Employee Benefits Consultants (ChFEBC℠). At PlanWell, we focus on retirement planning for federal employees. Learn more about our process designed for the career federal employee.
Preparing for a federal retirement? Check out our scheduled federal retirement workshops. Sign up for our no-cost federal retirement webinars here! Make sure to plan ahead and reserve your seat for our FERS webinar, held every three weeks. Want to have PlanWell host a federal retirement seminar for your agency? Reach out, and we’ll collaborate with HR to arrange an on-site FERS seminar.
Want to fast-track your federal retirement plan? Skip the FERS webinar and start a one-on-one conversation with a ChFEBC today. You can schedule a one-on-one meeting here.
