Working and claiming Social Security can increase your monthly income and give you a more comfortable lifestyle than you could have with just one or the other. It's a sound strategy for those who would like to retire but don't have the savings to quit the workforce just yet. But there's one big caveat: the earnings test.
Below, we'll talk about what this is and how it could cost some Social Security beneficiaries a bit of their checks. We'll also look at how you might be able to avoid it.
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How the Social Security earnings test works
The Social Security earnings test enables the government to withhold some seniors' benefits if they earn too much during the year. This only applies to those who claim Social Security under their full retirement age (FRA). That's 66 to 67 for today's workers. If you're over this age, you may work and claim Social Security without fear of losing any of your checks.
If you're under your FRA, the amount you'll lose to the earnings test depends on your age and annual income. In 2023, you lose $1 for every $2 you earn over $21,240 if you'll be under your FRA for the entire year. If you'll reach your FRA this year, you only lose $1 for every $3 you earn over $56,520, assuming you reach this amount before your birthday. In 2024, these limits will rise to $22,320 and $59,520, respectively.
Smaller checks might be disappointing, but it's only temporary. When you reach your FRA, the Social Security Administration recalculates your benefit amount to account for the money it previously withheld due to the earnings test. This gives you larger checks going forward.
However, your checks still won't be as large as someone who waited until their FRA to sign up for Social Security in the first place. That's because the government shrinks your benefit when you claim early. The earnings test may reduce how much you receive from Social Security under your FRA, but you'll still get something, so you'll always wind up with less than someone who never claimed until their FRA.
How to avoid the Social Security earnings test
There are two ways to avoid the Social Security earnings test. If you wait until you're at or beyond your FRA to sign up, the earnings test won't apply to you, regardless of your annual income. That doesn't mean you'll avoid Social Security benefit taxes, though.
The other way to avoid the Social Security earnings test is to keep your income low enough that the government doesn't reduce your checks. You may be able to do this by transitioning to part-time work, but this may not be an option for everyone.
If you can't avoid the Social Security earnings test, the next best thing to do is plan for it. Use your annual income estimates to figure out how much you might lose from your checks each month. Keep in mind that you won't lose anything until your income exceeds the thresholds outlined above.
Use this information when planning your budget for 2024 and beyond. If you have any questions about the Social Security earnings test or how it could affect you, reach out to the Social Security Administration for clarification.
