WHAT ARE Outside Earnings

Outside earnings is income earned by early retirees as they continue to work while claiming Social Security benefits. The Social Security Administration permits outside earnings. However, there is an annual limit. Going past this limit reduces future Social Security benefits.

Outside earnings only affects early retirees until they reach full retirement age. According to the Social Security Administration, the early retirement age is between 62 and 65. For those born between 1943 and 1954, full retirement age is 66.

Earnings above the outside earnings limit reduce future benefits by $0.50 for every dollar over the limit. Knowing the rules about outside earnings is important for retirees who want to claim early benefits, but avoid unnecessary penalties.

BREAKING DOWN Outside Earnings

Outside earnings include wages, as well as employee contributions to retirement plans if those are included in gross wages. For individuals who are self-employed, only net earnings from self-employment count as outside earnings. Government benefits, investment earnings, interest, pensions, annuities and capital gains are not outside earnings, however.

For example, say a married woman claims early Social Security benefits at age 62. By doing so, she collects $800 a month, which is less than the full amount she’d receive at age 66. She decides to keep working part-time at a marketing agency that pays her $1,800 a month.

As of 2018, the annual outside earnings limit was $17,040, which breaks down to $1,420 a month. Applying this limit, her Social Security benefits are the equivalent of only $610 a month. That is, she’s lost out on $190 a month, or half the $380 a month difference of her $1,800 in earnings and the $1,420 outside earnings limit. This benefit reduction continues until she reaches the full retirement age of 66. However, there is no outside earnings limit at full retirement.

Pros and Cons of Outside Earnings

Early retirees who either do not expect to live far into full retirement or who have plenty in retirement savings may choose early Social Security benefits. However, the outside earnings limit is a consideration even for those who plan on working a well-paying part-time job.

Also, there’s a double penalty for those who exceed the outside earnings limit. Remember taking early retirement already reduces their full Social Security benefit as much as 25%. On top of this, the penalty for exceeding the outside earnings limit is quite stiff.

One small break concerning outside earnings is a special rule for those who take early retirement in the middle or near the end of a year. Even if they exceed the annual outside earnings limit the Social Security Administration lets these individuals take a full Social Security check for any whole month they are retired, regardless of their yearly earnings.