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Choosing the appropriate timing to claim Social Security benefits might have a big impact on how much you end up receiving in retirement.

A major amount of retirees’ income comes from Social Security, yet many don’t know fundamental facts about the program.

A 2020 study by MassMutual indicated that roughly 52% of respondents failed or barely passed a Social Security survey.

The study evaluated people’s understanding of everything from full retirement age to when the Social Security trust fund would be tapped.

While many people have misconceptions about how Social Security works, not knowing the essentials could result in lost benefits.

The earnings test is one of the most misunderstood aspects of Social Security retirement. It applies to persons who work and obtain benefits before retirement age.

How Social Security Works

Let’s start with some Social Security basics.

The Social Security Administration calculates benefits based on a worker’s 35 greatest earning years (indexed for inflation).

Full retirement age (FRA) varies between 66 and 67, depending on when you were born.

If you collect before FRA, your monthly benefit will be permanently decreased by a percentage for each month you collect before FRA.

Every year after the full retirement age, individuals can earn an additional 8% in benefits. That means a 67-year-old can receive 124% of their monthly income if they wait until 70.

They would receive $3,720 per month if they received $3,000 per month at FRA but waited until age 70 to collect.

The retirement income test

The retirement earnings test was part of President Franklin Roosevelt’s 1935 Social Security legislation.

The Social Security earnings test applies to those who work and prefer to claim benefits before FRA. Every dollar an individual earns above a specific threshold reduces their Social Security benefits.

In other words, a working person who collects before FRA will see their benefits decreased.

Those withheld benefits are not lost forever. Workers will regain lost benefits after FRA.

This means that benefits withheld by the Social Security Administration prior to FRA will be fully reimbursed thereafter.

The earnings test has remained in force since 1935 despite various legislative modifications.

However, according to historian Larry Dewitt in 1999, “the RET is part of the Social Security Act because Social Security was designed as an insurance scheme,

which seeks to compensate covered individuals who suffer a loss of income due to retirement.”

Social Security

What is the retirement income test?

The retirement earnings test may deter some retirees from working while collecting benefits, but it shouldn’t deter you from working.

(Note: If you make enough money, Social Security may withhold all of your payments, so you may be better off waiting.)

If you maintain working, the Social Security Administration evaluates your earnings and may recalculate your payment for future years.

Social Security will compute your withholding depending on your salary and then send you fewer checks or a lesser monthly payment, according to Jim Blair, the Lead Consultant at Premier Social Security.

After FRA, the Social Security Administration will recalculate your benefit so you don’t lose any cumulative benefits.

While you may not receive your full Social Security benefits while working, after you reach FRA, you will recover any money withheld before. Extra checks or a greater monthly benefit may be given.

The earning test has two income limits: one for retirees who are more than one year away from FRA and one for those who are less than one year away.

Income does not include investment earnings, government subsidies, interest, or capital gains.

In 2022, it was $19,560. For every $2 earned above this threshold, the Social Security Administration deducts $1 from a worker’s benefit.

The maximum is $51,960. For every $3 you earn over this limit, Social Security will deduct $1 from your payment.

That implies a 67-year-old can earn up to $51,960 before the earnings test kicks in (i.e. before the government would withhold benefits if you were still working).

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Consider this:

  • Social Security would withhold $12,720 ($45,000 – $19,560)/2] from your benefits if you chose to receive them at 63 (and your FRA is 67).
    On their website, Social Security includes a Retirement Earnings Test calculator.

And that affects the spousal benefit. Working while claiming worker or spousal benefits before FRA may result in both benefits being withdrawn.

In other words, the worker’s wage affects both his/her own and spousal benefits, but the spouse’s salary just affects the latter.

Increasing your SSI benefits

Social Security is meant to augment other retirement income sources including 401(k)s, regular and Roth IRAs, and pensions.

Because the average monthly Social Security payment is approximately $1,658, saving for retirement as early as feasible is critical.

Taking advantage of your employer’s 401(k) match should be your first focus. After you’ve maxed out your match, you may choose to start a regular or Roth IRA.

Because your initial donations are taxed, your investments grow tax-free over time. But Roth IRAs have an income cap.

Individuals must earn less than $144,000, and married couples must earn less than $204,000. People who expect to be in a higher tax bracket in retirement might consider a Roth IRA.

However, a regular IRA offers a different tax benefit. Your initial payments are tax-free, but your retirement distributions are. A typical IRA has no income cap.

Traditional IRA contributions may be tax-deductible depending on your income and your employer’s retirement plan.

Your contributions reduce your taxable income, lowering your tax bill in the year you contribute.

In short,

When to collect Social Security benefits might have a big impact on your retirement finances.

You could be missing out on thousands of dollars in benefits if you don’t know what your FRA is or how the earnings test works.

The earnings test reduces your benefits if you continue to work and claim benefits before your FRA.

Remember that the withheld money will be returned to you once you reach FRA, either in the form of a greater monthly benefit or more checks.

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