If you are planning on drawing on your Social Security benefits before you reach the full retirement age, you will need to take the Retirement Earnings Test. The results of this test will have a significant impact on the money you are able to draw to supplement your income leading into your official retirement.
Normal retirement age
Before considering the Social Security earnings tests, it’s important that you have a firm understanding of what the normal retirement age is. The Social Security Administration handily breaks down normal retirement age by the year in which you were born. If you were born between 1943 and 1954, you can retire when you reach the age of 66. For those born between 1955 and 1959, your official retirement age increases by two months per additional year — someone born in 1955 would retire at 66 years and two months, someone born in 1956 would retire at 66 years and four months and so on. Anyone born from 1960 on can expect to retire at 67 years old.
Early retirement age
Per the SSA, 62 years old is the earliest you can draw from your Social Security retirement benefits. Early withdrawal of benefits results in a reduction of your benefit amount, and that reduction increases the later you were born. An individual born in 1960 or after who would draw out Social Security beginning at 62 would see a monthly benefit reduction of 30 percent in the first year, about 25 percent at age 63, about 20 percent at age 64, about 13.3 percent at age 65 and about 6.7 percent at age 66. You will see a similar reduction in benefits for each year of early withdrawal if you are receiving spousal benefits.
The SSA notes that the reduction in benefits prior to reaching NRA is not indicative of lost benefits. Rather, the withheld amount will be added to your monthly benefit after you reach NRA. In most cases, a beneficiary who draws benefits earlier will regain most if not all benefits withheld in the years before reaching NRA.
The Retirement Earnings Test
The Retirement Earnings Test is only something that you need concern yourself with if you plan on withdrawing your retirement benefits prior to the normal retirement age. Because you will still be working in some capacity, the RET allows an exemption of up to $46,920 for those reaching NRA in 2019 and up to $17,640 for those reaching NRA after 2019.
You can still withdraw Social Security benefits if you make more than the exempted amount, but you will have $1 in benefits withheld for every $2 in excess earnings if you are achieving full retirement age after 2019 and $1 in benefits withheld for every $3 in excess earnings if you are achieving full retirement age in 2019.
Your maximum exemption includes any money that the IRS would consider earned income; wages and disability count toward your exemption, but interest and dividends earned on your retirement portfolio, child support, alimony and unemployment benefits do not.
Early Social Security benefit withdrawal can be a great boost to help you get to the finish line before you reach full retirement age, but it helps to know what withdrawing early entails and how it might affect your plans. If you are still not positive whether early Social Security withdrawal is appropriate for your situation, speak with your retirement planner.