A big reason experts advise waiting until at least full retirement age to claim Social Security: You get to skip the Social Security benefits earnings test, which hits early claimers who are still working. But there are actually two earnings tests–an annual test and a monthly test–and the second one can help early retirees leaving work midyear avoid the trap.
Here are five things you need to know about the two Social Security earnings tests.
Social Security Earnings Test for Annual Income
The Social Security Administration always applies the annual earnings test first. Based on that test, the agency temporarily withholds $1 of a worker's benefits for every $2 earned over $18,960 for 2021. In a year the worker hits full retirement age, the test is more generous–the worker forfeits $1 in benefits for every $3 in 2021 earnings above $50,520.
In the month a worker hits full retirement age, the annual earnings test goes away. The worker can earn whatever he or she likes, and the monthly benefit amount will be adjusted upward to take into account all benefits forfeited in the past (more on recouping lost benefits below).
Social Security Monthly Earnings Test
If you're tripped up by the annual test, you still have a shot at your full benefit. The SSA will apply a monthly earnings test and set your payments according to whichever test is better for you. "It helps people who retire in the middle of the year not to be penalized," says Jim Blair, a former Social Security district manager and a partner at Premier Social Security Consulting, in Sharonville, Ohio.
The monthly test can be used for only one year, usually the first year of retirement. And it comes into play generally for midyear retirees who have already earned more than the annual limit. Those who pass the monthly earnings test can receive 100% of their benefits for any whole month the agency considers them retired, regardless of total annual earnings.
How the Social Security Monthly Earnings Test Works
Here's how the Social Security monthly earnings test works: If you’re under full retirement age for all of 2021, you’re considered retired in any month you earn $1,580 or less. If you reach full retirement age in 2021, you’re considered retired in any month you earn $4,210 or less.
Say a new Social Security beneficiary will turn 62, the earliest age at which you can claim Social Security but yet nowhere near his Social Security full retirement age, in June. He wants to retire at the end of June after making $100,000 in the first half of 2021, and he wants to start collecting Social Security benefits in July.
Based on the annual earnings test, he'd get no benefit. But in July through December, if he earns $1,580 or less each month, the monthly earnings test would open the door to full benefits. If he went over that amount in a month, then the SSA uses the $100,000 he earned through June and he would not receive a Social Security check for that month.
When retiring in the year you reach full retirement age, the earnings test only applies in the months prior to the month of your birthday. The higher threshold of $4,210 would apply if the monthly test is used in 2021. The earnings tests count only earned income from a job or self-employment; investment income, for example, and retirement-plan payouts are ignored.
Recouping Benefits Lost to the Social Security Earnings Tests
The burning question when a person loses Social Security benefits to the earnings test: When do I get my money back?
Unfortunately, you won’t get all your temporarily forfeited benefits back in a lump sum at full retirement age. Instead, your monthly benefit amount is adjusted upward in the month you hit full retirement age to account for forfeited benefits. The disappearing benefits essentially reduce the amount of time you were considered to have claimed benefits early.
Say you took benefits at age 62 instead of waiting to your full retirement age of 66, giving your benefits a haircut of 25%. If you forfeited 12 months’ worth of benefits to the earnings test, at your full retirement age, you’ll be treated as if you claimed benefits three years early, instead of four. Your lifetime benefits reduction will get slashed from 25% to about 20%. That puts more money in your check every month, and if you live long enough, you’ll recoup all the benefits the earnings test temporarily took away.
Beware of Receiving More in Benefits Than You Should
If you work while claiming early benefits, call Social Security with your estimated earnings so you don't get more benefits than you’re due. “Eventually, earnings are posted to your record and they'll see they overpaid," Blair says. The SSA will want the money back–and will withhold benefit checks until the overpayment is cleared.