Working in early retirement? Your Social Security could be reduced

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Earning more could lower your benefits.

© Jelena/stock.adobe.com; Photo illustration Encyclopædia Britannica, Inc.

There’s no question that working in retirement has become a trend—and for good reason. With so many people living longer, some retirees are eager to keep earning (and saving), as well as stay active.

But continuing to work after you retire can be tricky. If you’re also collecting Social Security—and haven’t yet reached your full retirement age (which in and of itself means a reduced benefit)—your Social Security benefits could be reduced even more while you’re working, depending on your total income.

Although the vast majority of adults over age 65 don’t work, according to a study by the Pew Research Center, 19% were employed either full- or part-time in 2023. That’s about double the number of Americans over 65 who were employed in 1987, the study found.

Although there are numerous benefits to being a working retiree, it’s important to understand how the additional income can impact your Social Security benefits. The first thing to note is that your monthly Social Security benefits will be permanently reduced if you claim benefits before your full retirement age (FRA)—that’s 67 for those born in 1960 or later. In addition, you will temporarily lose a portion of your benefits if your total income is over a certain limit.

The good news: once you reach full retirement age (FRA), you can earn as much as you like without affecting your benefits. And if your Social Security benefits were reduced earlier because of your earned income, they will be recalculated when you reach FRA. Your new “permanently reduced” monthly payment will actually increase. Just bear in mind that your Social Security benefits could be taxed, depending on your total combined income and filing status.

Here’s how it all works.

Let’s say you turn 62 on January 1, 2024, and you will be getting $1,000 per month ($12,000 per year) in Social Security benefits. If your total income from work and Social Security is less than $22,320, you’ll get that full benefit amount.

If your total income is over $22,320, Social Security will deduct $1 in benefits for every $2 above that threshold.

So if your total income in 2024 is $32,320—or $10,000 over the limit—Social Security will reduce your benefit amount by $5,000 for the year. Thus, instead of $12,000 per year, you would only receive $7,000 in Social Security for 2024. The Social Security Administration will pay you zero benefits for your first five monthly checks, and pay your regular $1,000 checks for the rest of 2024, totaling $7,000.

That money is not wholly lost, however. Once you reach full retirement age, your benefits will be recalculated. In our example above, the five months of receiving zero benefits will be added to the date of your claiming benefits (instead of at age 62, you really claimed at 62 and five months), which will increase the permanently reduced ongoing monthly payments for the rest of your life.

And it’s cumulative. Suppose you work until age 67 (your FRA) and each year between ages 62 and 65 your benefits were reduced by five months. Because of those 25 months of reductions, your new claiming age will be 64 years, one month, and result in a higher benefit for the rest of your life. Not as much as it would have been had you continued working until your FRA or beyond, but better than the fully reduced level. For your actual benefit reduction under certain scenarios, refer to the SSA retirement planner here.

That said, spouses and survivors (widows, widowers) who receive benefits because they have children who are minors or children with disabilities in their care wouldn’t receive increased benefits at full retirement age if benefits were withheld because of the income threshold. Also note that different rules apply if you work outside the United States, or if you receive Social Security disability benefits or Supplemental Security Income payments.

The picture changes during the year you reach your FRA. Let’s say you claim Social Security starting in January 2024, and you’ll reach your FRA in September. If your total income is less than $59,520 from January to August, your Social Security benefits won’t be reduced.

But let’s say you earn $62,520, or $3,000 over the limit for those eight months. Because it’s the year of your FRA, instead of a $1 for $2 reduction, your benefits would be reduced by one-third of the extra income for that time (in this case, $1,000). Assuming the same Social Security benefit amount of $1,000 per month, your benefit would be withheld for the month of January, and you would begin receiving your regular Social Security payments in February.

Again, starting the month you reach FRA, your earnings won’t affect your benefits. But depending on your total income, a portion of your Social Security benefits might be taxed.

It’s important to distinguish between different types of income, especially for retirees, who may have income from different sources.

Earnings that count toward the income cap include:

Earnings that don’t count toward the income cap include:

If you’re employed, meaning you work for wages, and you claim Social Security, your wages count toward the Social Security income limits. Any employer or employee contributions to a 401(k), 403(b), or pension that are included in gross wages count toward the income cap.

Also, income counts for the time period in which it’s earned, not when it’s paid to you. So if you have accumulated vacation pay, sick pay, or bonuses earned in 2024, but you don’t see the money until 2025, these would be counted toward your income in 2024.

If you are self-employed, only your net earnings are counted. And in this case, income counts when you’re paid, not when you earn the money. So earnings from a project you worked on in 2024—but that paid you in 2025—would be counted toward your 2025 income.

Social Security can be tricky under any circumstances, but retirees who decide to continue working while also claiming benefits—particularly if those benefits began before full retirement age—need to be especially careful when doing their income planning. If you’re going to lose several months of Social Security payments at the beginning of the year, make sure you budget for it.

You might decide to “retire” and start that easier, part-time job at age 62. That’s great! But if you know your earnings will exceed the extra reduction threshold, think twice about starting Social Security benefits so early unless you absolutely, positively need the extra income. Not only will you permanently reduce your benefits by starting before your FRA; you will also temporarily lose benefits if your income is over the threshold. Plus, your Social Security benefits could be taxed if you make too much money.

Although your benefits will be recalculated for any monthly payments that were held back, depending on how long you live, it might end up that the money you draw from Social Security after taxes would be less than you’d get if you waited until full retirement age.