Understanding the Social Security Earnings Test for Early Retirees

You can work part-time and start drawing benefits before full retirement age, but expect smaller Social Security checks – even if you put your earnings toward a 401(k).

I am 62 years old and plan to start collecting Social Security benefits this year while working part-time. Can I reduce the amount of income subject to the Social Security earnings cap by contributing to a 401(k) plan?

No. Although your 401(k) contributions can lower your taxable income, it's your gross wages from a job or self-employment -- before any deductions for taxes or 401(k) contributions -- that determine whether your Social Security benefits will be reduced under the earnings cap. See the Social Security Administration's fact sheet for more information about the income that counts toward the earnings test.

The full retirement age for people who, like you, were born from 1943 through 1954 is 66. If you collect Social Security benefits before you reach that age and you continue to work, you will lose $1 in benefits for every $2 you earn above $14,640 in 2012. The earnings limit is higher in the year you turn age 66: You lose $1 in benefits for every $3 you earn above $38,880 until the month you reach full retirement age. Once you turn 66, the earnings restrictions disappear.

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But you don't "lose" money to the earnings test forever. Instead, your benefits will be recalculated at your full retirement age and increased to make up for the months when your benefits were withheld because of the earnings test.

For more information about the earnings test and how your benefits are recalculated, see the Social Security Administration's fact sheet "How Work Affects Your Benefits."

Kimberly Lankford
Contributing Editor, Kiplinger's Personal Finance

As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.