social security

How the Social Security Earnings Test May Affect Your Retirement

If you start taking Social Security benefits before your full retirement age and decide to continue working, you need to understand how the earnings test works.

More than half of Americans surveyed by Voya Financial plan to work in retirement. If you share that plan, you may assume that you can easily combine paid employment with other sources of retirement income, such as your retirement savings and Social Security.

However, if you claim Social Security before your full retirement age — which is based on your year of birth — your benefits may be reduced through a mechanism known as the Social Security earnings test. Essentially, this rule limits your benefits if your paid employment earnings exceed certain thresholds.

The good news is that once you reach full retirement age, the benefit amounts that were withheld due to the earnings test will be returned to you in future Social Security payments. However, that doesn’t help when you are trying to balance your budget during the early years of retirement.

How the earnings test works

The impact of the earnings test on your benefit can be broken down into three distinct phases. Each phase is based on your current age relative to your full retirement age.

  • Stage 1: You will not reach full retirement age in 2021: In this stage, you can earn as much as $18,960 a year from employment without affecting your Social Security benefits. There will be a $1 reduction in Social Security payments for every $2 of earnings over the $18,960 limit. In the event of a reduction, Social Security withholds benefits in the form of whole payments at the beginning of the year. If Social Security withholds too much, that means money will be refunded in the next calendar year.
  • Stage 2: You will reach your full retirement age in 2021 If you will reach your full retirement age during 2021, the earnings test is much less restrictive. You can earn as much as $50,520 a year from employment without affecting your benefit. There will be $1 reduction for every $3 of earnings over the $50,520 limit.
  • Stage 3: You reached your full retirement age before 2021: If you have already reached your full retirement age before 2021, the earnings test doesn’t apply to your earnings. You are free to earn as much as you want while receiving your full benefit.

Special Rule: A special rule exists for filers that fall into phase 1 and 2 who retire from employment mid-year. Regardless of your earnings, if you stop receiving employment income once you collect Social Security, you can collect your entire benefit without reduction due to the excess earnings test.

Social Security claiming primer

The amount of your Social Security benefit depends on your earnings history and your age. Social Security benchmarks all benefits around the concept of full retirement age, which for those born between 1943 and 1960 is between ages 66 to 67.

At full retirement age you receive what is known as your full benefit or primary insurance amount (PIA). If you claim Social Security before your full retirement age, your benefit is reduced. Similarly, if you claim after your full retirement age, your benefit is increased.

The earliest you can claim Social Security is age 62; the latest you can claim to receive the maximum potential benefit is age 70.

Social Security Full Retirement Age Table

A table shows the full retirement ages for Social Security.

Social Security Administration

Source: U.S. Social Security Administration

Managing employment and Social Security benefits

Ultimately, the Social Security earnings test does not affect the benefit you receive over the course of your retirement because Social Security will make up any benefit reductions later when you reach full retirement age. However, this isn’t much comfort when you’re trying to balance your budget in early retirement. That’s why it’s critical to understand the earnings test and weigh all of your possible options when making your Social Security filing decision.

Advisory services offered through J.W. Cole Advisors, Inc & Blue Financial are unaffiliated entities. No information provided is intended as a solicitation to buy or sell any security. Blue Financial is an independent financial services firm helping individuals create retirement strategies using a variety of investment and insurance products to custom suit their needs and objectives. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax, or investment advice.
Licensed Insurance Professional. The licensed professional can provide information, but not advice related to social security benefits. The licensed professional may be able to identify potential retirement income gaps and may introduce insurance products, such as an annuity, as a potential solution. For more information, contact the Social Security Administration office, or visit www.ssa.gov. 20988 - 2021/5/3

About the Author

Austin Powell, CFP®

Partner, Blue Financial

Austin Powell is a wealth adviser at Blue Financial. He has a bachelor’s in business administration from North Carolina State University, where he was also an All-ACC tennis player. He has earned the prestigious CERTIFIED FINANCIAL PLANNER™ certification in addition to being a National Social Security Advisor (NSSA®). He has a Series 65 securities license and a life & health insurance license. As a fiduciary, he operates with full transparency and does what is in the best interest of his clients.

Most Popular

Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
11 Best Monthly Dividend Stocks and Funds to Buy
Kiplinger's Investing Outlook

11 Best Monthly Dividend Stocks and Funds to Buy

Your bills come monthly. Why not your dividend checks? These are some of 2021's best monthly dividend stocks and funds for easier income planning.
June 16, 2021
You Can Appeal a Medicare Premium Surcharge
Medicare

You Can Appeal a Medicare Premium Surcharge

If you meet one of the seven qualifying life events, you have a good chance of getting a higher premium for Medicare Part B and Part D reduced.
June 16, 2021

Recommended

14 Social Security Tasks You Can Do Online
retirement

14 Social Security Tasks You Can Do Online

Why visit a government office to get your Social Security business done? You can do much of that online.
April 2, 2021
To Be Happy in Retirement, Don’t Be Afraid to Use Your ‘Nuts’
happy retirement

To Be Happy in Retirement, Don’t Be Afraid to Use Your ‘Nuts’

Forage, dig, bury, repeat. That’s what squirrels do with nuts, and it’s basically what retirement savers do too. However, while squirrels dip into the…
June 23, 2021
Dream of Working Abroad? Beware of Some Serious Financial Pitfalls
places to live

Dream of Working Abroad? Beware of Some Serious Financial Pitfalls

You can work anywhere now, so why not go wild and try the expat life in some exotic locale you’ve always dreamed of? OK, but first you need to researc…
June 23, 2021
How Biden’s Tax Plan Could Affect Your Real Estate Investments
real estate investing

How Biden’s Tax Plan Could Affect Your Real Estate Investments

Should you sell your real estate investments before any changes to capital gains taxes or 1031 exchanges get made? That’s what many people are asking.…
June 22, 2021