Social Security Earnings Test : How Earnings Affect Benefits

Kevin Wenke

Kevin Wenke

Owner at Decision Tree Financial. CFP. CLU

If you decide to take Social Security retirement income before you reach Full Retirement Age and you plan to continue working, you will want to understand the Social Security Earnings Test.

This Earnings Test impacts your benefits AND the benefits of your beneficiaries (like spouses and children) who receive benefits based on your work history.

Full retirement age (Or FRA) is based on the year you were born and is currently maxed out at age 67 for anyone born AFTER  January 1, 1960.

Workers are generally eligible to receive a reduced amount of their social security retirement benefits as early as age 62.

In 2022, a Social Security retirement recipient can EARN less than $19,560 per year and not have any of their Social Security retirement withheld. Note this is EARNED income (ie – Social Security wages) and not pension income, income from dividends on your stock portfolio or even K-1 income from your own business.

However, earning more than that amount can have surprising results.  Once a Social Security recipient earns over $19,560, one dollar for every two dollars earned is lost income in benefits that year.

This changes a little bit in the year a recipient reaches Full Retirement Age (FRA).  The rules permit an income of a little bit more at $51,960 a year and when that level is surpassed you lose $1 for every $3 earned over that limit that year.

As a quick example of how this test works, assume a worker retired and started Social Security benefits at age 62.  Now he is 63 which is still below his full retirement age, and he is offered a job with a $29,560 salary.  That is $10,000 over the allowable income threshold, so half that number or $5,000, would be withheld from benefits the next year.

Social Security withholds benefits based on $1,000 increments and withholds the entire amount before they start paying again.  In our example, if the person had earned $2 more requiring 5001 to be withheld, then the Social Security Administration would keep $6,000 the following year!

A common question is, “What if I retire and start benefits in the middle of the year?”  How is the earnings test determined if I make more than the limit before I start receiving benefits?”  In this instance, the benefits go from yearly to monthly calculation.  The administration will not count the income you had prior to receiving benefits.

Even though the administration could take away benefits the year you exceed the earnings test, there is a potential upside.

That upside is that when you do reach full retirement age, the Administration will reset and increase your benefits. Kind of like the earnings you lost are given back to you later as an increased annuity payment for the rest of your life.

Another way of looking at this is if you started taking Social security the month you turned 62 and were receiving $1,000 a month, but then the administration withheld $6,000, then they would reset your Full retirement age benefits to show you actually waited six additional months.

Like all annuities, even though the Social Security Administration can credit your account back the money they withheld due to the Social Security earnings test, you still have to live long enough to reach Full Retirement Age in order to break even on your increased benefits from the readjustment. However, if you do live a long time, the income increase can add up to a lot! They may be tax free and are also eligible for the annual cost of living adjustment which in 2023 may be up to 10.8%!

The big thing to understand is the Social Security Administration doesn’t just take your money away from you if you make too much before your full retirement. This is big misunderstanding a lot of retirees have.

Another important note is your beneficiaries may not receive any additional benefits they may have withheld. Yes, there are some moving parts to consider (such as you beneficiary benefits), but there are solutions to every problem.

Decision Tree Financials’ The Wealth Manifestation Process helps you find solutions by taking a comprehensive look at your entire financial picture. We make it easy to make the best decisions for your future which makes it easy to have the life you want for yourself.

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