How Working During Retirement Impacts Your Social Security Benefits
How to occupy your free time is one of the largest decisions you’ll face during retirement. Perhaps learning an instrument, playing a sport, volunteering, or traveling will fill up your calendar. If you’re like many retirees, working part time is sometimes also an option (or perhaps even a necessity). While working during retirement is often a smart way to pass the time and can provide you with a sense of purpose and structure—while of course allowing you to generate additional income—you should know how collecting a paycheck can impact your Social Security benefits.
Know your full retirement age (FRA)
You can start receiving Social Security benefits at age 62. However, you won’t be entitled to 100% of your benefits until you reach your full retirement age (FRA).
This number is based on your birth year; if you were born after 1960, your full retirement age is 67 (currently). Familiarizing yourself with your own specific number can help determine how working during retirement will impact your Social Security benefits.
How much money you can earn while collecting Social Security
If you work before reaching your FRA, the dollar amount of your monthly Social Security check is sometimes temporarily reduced if you earn more than the yearly earnings limit set by the Social Security Administration (SSA).
Based on 2024 limits, the SSA will deduct $1 from your Social Security benefit payments for every $2 you earn above the annual earnings limit if you fall below your FRA for the entire year. In this scenario, the current limit is $22,320. Therefore, if you earn $25,000 annually, Social Security will withhold $1,320 of your benefits as you’re $2,680 above the earnings limit.
If you work during the year you’ll reach your FRA, Social Security will deduct $1 for every $3 you earn above the limit. The 2024 limit is $59,520 in this scenario and only includes earnings before the month you reach your FRA. Therefore, if you earn $70,000 from January through October and don’t hit this age until November, $3,493 is withheld.
If you’re still working when you reach full retirement age, your earnings no longer reduce your benefits no matter how much you earn.
How the Social Security Administration holds benefits to recoup penalties
Know that withholding means the Social Security Administration will actually stop sending you a check until they recoup the amount owed. For example, if you owe $3,500 and your monthly Social Security check is $1,000, you won’t receive a check for four months—with the balance owed to you ($500) refunded at a later date.
It’s also important to note that you won’t actually lose your benefits: they’re just technically deferred and will be credited by adjusting your monthly benefit amount beginning the month you reach your FRA.
For example, let’s assume you claim Social Security at age 62 and the SSA withholds $5,000 because you earned $32,320 ($10,000 over the earnings limit). If your monthly benefit is $1,200, this results in 4.17 months of benefits lost. The SSA would round up to 5 months (they don’t process fractional payments) and then increase your benefit when you hit your FRA.
Social Security makes these adjustments automatically based on your W-2s and tax returns. Alternatively, you can report your estimated income at the beginning of the year and then reconcile at the end to minimize (or even eliminate) the number of checks withheld.
Income that counts when determining your Social Security earnings limit
If you work for someone else, your wages count towards Social Security earnings limits as soon as you earn them (rather than when they’re paid out). Contributions to a pension or other retirement plan, meanwhile, are also counted when the amount is included in your gross wages.
For example, if you earn pay for accumulated sick or vacation days or are awarded bonuses in 2024 that are paid out in 2025, these will count against your 2024 earnings limit.
If you’re self-employed, only net earnings are included against the limit and generally counted when you receive the income—rather than when you earn it.
The special earnings limit rule
Under a special Social Security Administration rule—which applies for one year, typically during the first year of retirement—you can receive a full SS check for any whole month you’re retired (regardless of yearly earnings). This rule was created so as to not penalize people who retire mid-year (or later in the year) and have already earned more than the earnings limit prior to retirement.
You must meet a few qualifications to take advantage of this rule. First and foremost, Social Security must consider you “retired”: meaning you’ve passed their monthly earnings test by engaging in only limited or no paid work. More specifically, your monthly retirement earnings must not exceed $1,770 if you haven’t yet reached your FRA.
You also cannot perform substantial self-employment services, meaning devoting more than 45 hours per month to your business (or 15-45 hours per month to a business in a “highly skilled” occupation).
To illustrate, let’s assume you plan on retiring at age 62 and collecting Social Security in November 2024. In this case, you’ll earn about $50,000 (significantly more than the earnings limit) from January through October of that same year. Provided your monthly income does not exceed $1,860 for the remainder of 2024, you’re entitled to enjoy full Social Security benefits in November and December.
The special rule also applies to those who retire and reach full retirement age in the same year. This works in a similar manner, the only difference being that you can earn a higher monthly income of up to $4,710 (rather than $1,770) to be considered “retired.”
Other considerations while collecting Social Security when employed
Each year, the Social Security Administration reviews files of all recipients who are working. If the latest year of earnings represents one of your most profitable years, they’ll reconfigure your benefit for the better (if applicable). This is an automatic process, with benefits paid in December the following year.
In sum: working and collecting Social Security
If you plan on working and collecting Social Security benefits prior to reaching your full retirement age, it’s helpful to know how your earnings can impact your benefits. This is precisely where proper planning comes into play—ideally with a financial advisor—so you can determine how to best optimize your Social Security benefits based on your own specific situation.
Still have questions about working and Social Security? Schedule a FREE Discovery call with one of our CFP® professionals.
FAQs
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Yes! If the Social Security Administration withholds some of your benefits because you earned too much during early retirement, your benefit will be recalculated when you reach your FRA to incorporate those withheld benefits (potentially giving you a higher benefit later on).
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No, capital gains are not included in the Social Security earnings limit income calculation.
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No, these three items are not considered income when determining the Social Security earnings limit.
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No, these are not counted as income when determining the Social Security earnings limit.
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No, these benefits (e.g., unemployment or disability benefits) do not count as income when determining the earnings limit.
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Contributions made to a pension or retirement plan are considered income if they are included in gross wages.
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No, there is no such increase (even if benefits were withheld due to work).
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Disclosures:
This document is a summary only and is not intended to provide specific advice or recommendations for any individual or business.
