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Applying for Social Security Before Retirement Age

If you are planning on taking Social Security benefits before full retirement age and plan on continuing to work you will want to make yourself aware of the earnings test.

The Earnings Test Is Only Applied Before Full Retirement Age

The earnings test reveals the amount you can earn each year prior to full retirement age without a portion of your Social Security benefits being withheld. In 2017, the exempt annual income amount for someone who has not yet reached retirement age is $16,920. For every $2 earned over $16,920, $1 in benefits will be withheld. (For related reading, see: 10 Commonly Asked Questions About Social Security.)

For example, Sheila is 62 and eligible for up to $1,600 per month in benefits. To find the point at which Sheila’s entire benefit would be withheld this year, we first find her total annual benefit amount.

$1,600 monthly benefit amount x 12 months = $19,200 annual benefit amount

We know that one dollar of benefits will be withheld for each $2 over the exempt income amount, so we know that we need to find twice the annual benefit amount.

$19,200 per year x 2 = $38,400 above exempt amount

And now we add that to the annual exempt amount to find the income threshold at which all of Sheila’s benefits will be withheld.

$38,400 above exempt amount + $16,920 exempt = $55,320 per year

So if Sheila works this year and her income is between $16,920 and $55,320, she will receive a part of her Social Security retirement benefit amount. But any income above that point will result in 100% of her benefit being withheld.

Here’s the most important thing to know about the earnings test. The easiest way to get around it is to wait until full retirement age or later to apply for benefits. The old way of managing earnings for the earnings test was to apply at 62 and work to keep your earnings under $16,920. The new way is to earn as much as possible for as long as possible, waiting until age 66 or later to apply for benefits. The extra earnings and higher Social Security income will provide much more financial security for Baby Boomers throughout retirement.

The Earnings Test Threshold Is Higher in the Year You Reach Full Retirement Age

If you applied for benefits early, you are allowed to earn more during the calendar year in which you reach full retirement age. In 2017, the higher amount is $44,880. One dollar in benefits will be withheld for every $3 earned over $44,880. Let’s say Joe, who applied for early reduced benefits, will turn 66 on October 15, 2017. Last year he was subject to the lower income amount earnings test. This year, starting back in January, he could have earned up to $3,740 per month before any benefits will be withheld. Starting October 1, the month he turns 66, there will be no earnings test at all. He may earn any amount and no benefits will be withheld.

Earnings Before the Month You Receive Your First Check Don’t Count

Under the special first year rule, earnings that happen before benefits start don’t count. Susan retires at age 64 on October 31, 2017. From January through October she earns $70,000. She applies for benefits which will begin on November 1, 2017, and no longer plans on working from that date forward. Although her earnings for the year exceed the 2017 annual limit ($16,920) no benefits will be withheld. (For more from this author, see: Social Security Benefits for Dependents.) 

Spousal and Survivor Benefits Can Be Withheld

The earnings test applies to spousal, survivor and even children’s benefits if the recipient is under full retirement age. So even though a widow may apply for her survivor benefit as early as age 60 and a spouse may start her spousal benefit at age 62, if the widow or spouse works, her benefit will be subject to the earnings test as long as she is under full retirement age.

What Income Counts?

All wages and self-employment income count for the earnings test. Wages are W-2 earnings. Self-employment income is Schedule C net income. In both cases, gross earnings are counted before contributions to retirement plans.

There is a provision for “special wage payments” such as vacation pay, sick pay, bonuses, etc. Whether or not these will be considered earnings for the earnings test depend on when they are received and, in certain cases, the type of payments they are.

Other forms of income, such as pensions, investment earnings, interest, annuities and capital gains, do not count for the earnings test.

Benefit Is Adjusted At Full Retirement Age

When benefits are withheld due to the earnings test, they are adjusted at full retirement age to credit back the actuarial reduction for those months in which benefits were withheld. This calculation is done automatically. While the math used is too complicated to explain in detail here, the bottom line is that benefits withheld under the earnings test aren’t lost forever and you will get them back when you reach full retirement age.

Work in Retirement Can Increase Your Benefit

Social Security continues to update each person’s earning record as additional earnings are reported. Your highest 35 years of earnings are used to calculate your benefit. If your earnings in retirement turnout to be higher than some of your pre-retirement years, the benefit will be recomputed and increased. Sometimes people wonder if their Social Security benefit will be adversely affected if they work part time in retirement. The answer is no. The adjustment will only be made if it results in an increase.

Ultimately, while your circumstances may vary, continuing to work will usually only help your Social Security benefit grow. If you are able to do so, working until you reach full retirement age, or even later, will give you greater financial stability in your golden years. (For more from this author, see: Often Missed Social Security Claiming Options.)


Securities and Investment Advisory Services are offered through Signator Investors, Inc., Member FINRA/SIPC, a Registered Investment Advisor. AspenCross Wealth Management is independent of Signator Investors, Inc.  1400 Computer Drive, Westborough, MA  01581.