Many Americans plan to work in retirement, whether to stay engaged, supplement income, or offset rising living costs. But for those who claim Social Security before reaching full retirement age, working can create an unexpected problem. Some or all of their Social Security benefits may be temporarily withheld under a rule known as the retirement earnings test, or RET.
Each year, more than 500,000 beneficiaries are affected by this rule. While the earnings test often causes frustration, it is frequently misunderstood. With careful planning, retirees can continue working while protecting their long-term Social Security income.
The retirement earnings test applies only to people who claim Social Security benefits before full retirement age, which is about 67 for most current retirees. If a beneficiary earns more than a set amount from work, Social Security withholds part of their monthly benefit.
The rule has existed since the early days of Social Security. Many beneficiaries assume the withheld money is a tax or permanent loss. In reality, benefits are delayed rather than eliminated, a distinction that becomes important over time.
Limits
The earnings thresholds change annually and apply only to employment or self-employment income.
For beneficiaries who are younger than full retirement age for the entire year, Social Security withholds $1 in benefits for every $2 earned above $24,480. In the year a beneficiary reaches full retirement age, the policy becomes less restrictive. Social Security withholds $1 for every $3 earned above $65,160, and only earnings before the month of the beneficiary’s birthday are counted.
Income from investments, pensions, annuities, and retirement accounts does not count toward the earnings test.
Numbers
An example helps illustrate how the earnings test works.
Consider a 64-year-old eligible for $2,800 per month in Social Security benefits, or $33,600 per year. If that individual earns $80,000 from work, the amount above the earnings limit is $55,520. Half of that amount, $27,760, is withheld from Social Security benefits. As a result, the beneficiary would not receive monthly checks for approximately ten months.
Lower earnings result in smaller withholdings. Those earning close to the limit may lose only one or two monthly payments.
| Age Range | Earnings Limit | Withholding Rule |
|---|---|---|
| 62 to FRA | $24,480 | $1 withheld per $2 over |
| Year of FRA | $65,160 | $1 withheld per $3 over |
| After FRA | No limit | No withholding |
Reality
A key aspect of the earnings test is that withheld benefits are not permanently lost.
Once a beneficiary reaches full retirement age, the Social Security Administration recalculates benefits and gradually increases monthly payments to account for previously withheld amounts. Over time, individuals who live long enough generally recover the full value of the delayed benefits.
However, the temporary loss of monthly income can create short-term cash flow challenges, particularly for retirees who rely on Social Security to cover basic expenses.
Timing
Deciding whether to work while claiming Social Security often comes down to timing.
Claiming benefits at age 62 while earning a full-time salary typically results in significant withholding and permanently reduced monthly benefits. In contrast, individuals who are semi-retired, earning modest income, and facing financial pressure may still benefit from claiming early, even if some benefits are withheld.
The decision depends on income needs, expected earnings, and how long an individual plans to continue working.
Planning
Several planning strategies can help reduce the impact of the earnings test.
One approach is managing income levels to stay below the earnings limit. This may involve reducing work hours, delaying bonuses, or spreading income across multiple years.
Self-employed individuals often have more flexibility. Delaying invoices or shifting income into a later tax year can reduce earnings subject to the test.
Before claiming benefits, many advisers recommend running detailed projections. The Social Security Administration offers a Retirement Earnings Test Calculator, and financial planners often use more advanced planning tools to compare scenarios.
Policy
The retirement earnings test has drawn increasing scrutiny. Supporters of repeal argue that the rule discourages older Americans from working at a time when many need additional income. Critics counter that eliminating the test could encourage earlier benefit claims and accelerate financial strain on Social Security.
For now, the earnings test remains in effect, making individual planning essential for those considering work before full retirement age.
Balance
Working in retirement generally increases total income over time, even when Social Security benefits are temporarily withheld. The greater risk often lies in claiming benefits early without understanding how work earnings affect payments.
Early and careful planning can help retirees balance employment income with Social Security benefits. By understanding the earnings test and its timing, retirees can make informed decisions that support both short-term cash flow and long-term financial security.
FAQs
Does the earnings test apply after full retirement age?
No, there is no earnings limit once full retirement age is reached.
Are withheld Social Security benefits lost permanently?
No, benefits are adjusted upward after full retirement age.
What income is counted under the earnings test?
Only wages and self-employment income are counted.
Can self-employed workers manage earnings to reduce withholding?
Yes, income timing may help limit withholding.
