If You’re Working in Retirement, Beware the Social Security Earnings Test

Working in retirement can have a lot of financial and health benefits. But early retirees who want to supplement their Social Security benefits with some part-time wages need to be aware of an important caveat: If you’re collecting benefits before you reach your full retirement age, the Social Security Administration (SSA) will reduce your monthly checks if your earnings exceed certain thresholds.

A simple test with big consequences

The Social Security earnings test is simple. If you earn below a threshold amount in one year, you pass the test. In your first year of retirement, the Social Security Administration will look at your monthly earnings to see if they’re below the threshold rate. If so, you’ll get your full retirement benefit for that month.

For 2022, the annual threshold is $19,560. That number gets bumped to $51,960 for the year in which you will reach full retirement age.

The penalty for failing the earnings test is a reduction in your benefits. The SSA will reduce your annual benefits by $1 for every $2 you earn over the limit.

So, if you say you’ll make $29,160 in 2022, you’ll see your total benefits reduced by $4,800. Your benefits will be withheld starting in January until your cumulative withheld payments total $4,800. Payments will then resume as normal. The penalties are less severe in the year you reach full retirement age. You only forfeit $1 in benefits for every $3 above the much-higher earnings limit.

And once you reach full retirement age, your benefits will no longer be subject to an earnings test. What’s more, you’ll receive a bump in your monthly benefits to compensate for the money you forfeited earlier in retirement.

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Your forfeited benefits aren’t exactly gone forever

Once you hit full retirement age, the SSA performs a new calculation: It adds up all the benefits you lost due to earning too much, and divides that sum by your standard monthly benefit. The result is the number of months’ worth of benefits you lost by earning too much. The SSA then recalculates your base monthly payment as if you had delayed filing for Social Security by that many additional months.

For example, let’s say you retire at 62, and your benefit is $1,000 per month. But because you work between 62 and 67 (your full retirement age), you end up forfeiting a total of $24,000 worth of benefits during those years due to the earnings test. $24,000 divided by $1,000 equals 24 — that’s the number of months’ worth of benefits you gave up.

So the SSA will pay you as if you didn’t file for benefits until 24 months (two years) after you actually did. Because you’ll be treated as if you had retired at 64, your new monthly benefit will be 14% higher at $1,143.

That does give you the opportunity to recoup the benefits you lose over time. However, in the example above, you’d have to live until 81 to fully recover the benefits forfeited.

A big pitfall to avoid

If you file for Social Security before you reach full retirement age and plan on continuing to work, you’ll need to report your expected annual wages to the Social Security Administration. They won’t know how much to reduce your benefits by if they don’t have that information — in which case, you’ll end up receiving your full benefits all year long.

But when your employer reports your wages at the end of the year, the SSA will see your earnings and — if it determines you received too much — come asking for some of its money back. Then you’ll have to pay back those extra benefits. If you weren’t planning for that, it could become a major headache. The SSA will withhold your monthly benefits until they make up for the amount you were overpaid.

If you’re relying heavily on Social Security in early retirement, you’ll need to be aware of how any work you do will impact your benefits. If you don’t plan for the reduction, it could become a budgeting nightmare.

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