Working While on Social Security: The Truth About Benefits

Picture this: You've started collecting Social Security at 62, but you're not quite ready to stop working completely. Maybe you've found a consulting opportunity that excites you, or perhaps you need the extra income more than you expected. Then you hear about the Social Security earnings test, and suddenly you're worried. Will working cost you your benefits?

Here's the good news that often gets buried in the fine print: The Social Security earnings test isn't nearly as scary as it sounds, and it's definitely not what most people think it is. Yes, the Social Security Administration (SSA) may temporarily withhold some of your benefits if you earn above certain limits. But here's the part that changes everything: you'll get that money back later through higher monthly payments.

Let's break down exactly how this works, so you can make confident decisions about working during your retirement years.

The Social Security earnings test applies if you're collecting retirement benefits before your full retirement age (FRA) and you're still earning income from work. Your FRA is either 66, 67, or somewhere in between, depending on your birth year. For anyone born in 1960 or later, it's 67.

The earnings test doesn't apply to everyone. Once you reach your full retirement age, you can earn as much as you want without any reduction in benefits. But until then, the SSA sets annual limits on how much you can earn from wages or self-employment before they start withholding benefits.

For 2024, here are the thresholds you need to know:

• Before the year you reach FRA: You can earn up to $22,320. Above that, the SSA withholds $1 in benefits for every $2 you earn over the limit.
• During the year you reach FRA (before the month of your birthday): You can earn up to $59,520. Above that, they withhold $1 for every $3 you earn over the limit.
• The month you reach FRA and beyond: No earnings limit applies. Work as much as you want.

Notice something important here: This is about earned income from working, not investment income, pensions, or other retirement account distributions. Your 401(k) withdrawals, IRA distributions, and stock dividends don't count toward these limits.

Here's where most explanations stop, and it's exactly where they shouldn't. When the SSA withholds benefits because you've exceeded the earnings limit, they're not taking that money away permanently. They're deferring it.

Once you reach your full retirement age, the SSA recalculates your benefit amount to account for the months when benefits were withheld. They do this by increasing your monthly payment going forward. Essentially, you're trading several smaller monthly checks now for a permanently higher monthly benefit later.

Let's look at a real example: Say you claimed benefits at 62 and would normally receive $1,400 per month. But you kept working and earned enough that the SSA withheld 12 months of benefits over the next few years. When you reach your FRA at 67, the SSA will recalculate your benefit as if you had claimed it a year later than you actually did. Your new monthly benefit might be around $1,500, and that higher amount continues for the rest of your life.

This recalculation happens automatically. You don't need to apply for it or request it. The SSA tracks the withheld benefits and adjusts your payment accordingly.

Whether working makes sense for you depends on several factors beyond just the earnings test. Here are the key considerations:

Your health and longevity expectations: If you're in good health and expect to live well into your 80s or beyond, getting those withheld benefits back as higher monthly payments works in your favor. The longer you live, the more you benefit from that increased monthly amount.

Your immediate financial needs: If you need income now and the work opportunity is there, the earnings test shouldn't necessarily stop you. Yes, some benefits might be temporarily withheld, but you're still earning a paycheck that likely exceeds what you'd lose in the short term.

Your other income sources: Remember, the earnings test only applies to wages and self-employment income. If you have substantial retirement account balances, pensions, or investment income, those don't trigger benefit withholding. You might be able to structure your finances to stay under the earnings limit while still maintaining your lifestyle.

Tax implications: Working while collecting Social Security can affect how much of your benefits are taxable. Between 0% and 85% of your Social Security benefits may be subject to federal income tax, depending on your combined income. This is a separate issue from the earnings test, but it's worth considering as part of your overall planning.

The strategic waiting game: For some people, the better strategy is simply to delay claiming Social Security altogether if they plan to keep working. Every year you wait past 62 (up to age 70) increases your eventual monthly benefit by about 6% to 8%. If you're working anyway, delaying might make more financial sense than claiming early and dealing with the earnings test.

If you're working while collecting benefits before your FRA, you'll need to report your expected earnings to the SSA. Here's how this works in practice:

When you first apply for benefits, the SSA will ask about your work plans and expected earnings. Be as accurate as possible. They'll use this information to determine whether to withhold any benefits throughout the year.

If your earnings change during the year (you get a raise, take on more hours, or stop working), you should report this to the SSA promptly. You can do this online through your my Social Security account, by phone at 1-800-772-1213, or by visiting your local Social Security office.

The SSA will also check your actual earnings after the year ends, when your employer reports your W-2 information or when you file your tax return showing self-employment income. If they withheld too much, they'll pay you back. If they didn't withhold enough, you may need to repay benefits, though they'll typically withhold from future payments rather than demanding a lump sum.

This annual reconciliation can feel confusing, but it's manageable if you stay proactive. The key is to communicate with the SSA when your situation changes, rather than waiting for them to discover discrepancies after the fact.

Mistake #1: Assuming all income counts. Only earned income from wages or self-employment triggers the earnings test. Your pension, 401(k) distributions, rental income, and investment returns don't count toward the limit.

Mistake #2: Thinking withheld benefits are lost forever. As we've discussed, you get this money back through higher monthly benefits after you reach FRA. The recalculation is automatic.

Mistake #3: Not reporting earnings changes. If you start earning more than expected, tell the SSA promptly. It's much easier to address benefit withholding in real time than to deal with an overpayment demand later.

Mistake #4: Forgetting about the year you reach FRA. The earnings limit is much higher during the year you reach your full retirement age, and it only applies to months before your birthday month. Once your birthday month arrives, no earnings limit applies for the rest of that year.

Mistake #5: Not considering the bigger picture. The earnings test is just one factor in your retirement income strategy. Consider your overall tax situation, longevity expectations, and financial goals before making decisions based solely on avoiding benefit withholding.

The Social Security earnings test sounds intimidating at first, but once you understand how it actually works, it becomes just another factor to consider in your retirement planning, not a reason to avoid work you want to do or need to do.

The most important takeaway is this: Withheld benefits aren't lost benefits. They're deferred benefits that come back to you as higher monthly payments for life once you reach your full retirement age. For many people, especially those in good health who expect longer lifespans, this actually works out to their advantage.

That said, everyone's situation is unique. Your health, financial needs, career opportunities, and other income sources all play a role in determining whether working while collecting early Social Security benefits makes sense for you. The earnings test is just one piece of a much larger puzzle.

Disclaimer: This article provides general information about Social Security rules and retirement planning. It is not personalized financial advice. We are not certified financial planners or advisors. Before making significant decisions about Social Security claiming strategies or retirement income, please consult with a qualified financial advisor or planner who can evaluate your specific circumstances and provide personalized recommendations.