Planning for Earned Income in Retirement

If you're like a lot of people, retirement won't be the world of gardening, golfing, traveling, and tennis you once envisioned. Rather, retirement will mean relaxing and working. Maybe you've retired from your "regular" job and started a business, or perhaps you want to work part-time just to stay busy. However, if you work after you start receiving Social Security retirement benefits, your earnings may affect the amount of your benefit check.

Your earnings in retirement may increase your retirement benefit

Your monthly Social Security retirement benefit is based on your lifetime earnings. When you become entitled to retirement benefits at age 62, the Social Security Administration (SSA) calculates your primary insurance amount (PIA) upon which your retirement benefit will be based. Later, your PIA will be recalculated annually if you have had any new earnings that might substantially increase your benefit.

Your earnings in retirement may decrease your retirement benefit

If you earn income over a certain limit by working after you begin receiving retirement benefits, your benefit may be reduced proportionately. This limit, known as the retirement earnings test exempt amount, affects only beneficiaries under full retirement age. The benefit reduction is based on your annual earnings and is not permanent.

Even if your monthly benefit is reduced in the short term due to your earnings, you'll receive a higher monthly benefit later. That's because the SSA recalculates your benefit when you reach full retirement age, and omits the months in which your benefit was reduced.

How much is the retirement earnings test exempt amount?

In 2024, the annual exempt amount is $22,320 for beneficiaries under full retirement age. However, in the year you reach full retirement age, a different limit applies. The limit in 2024 is $59,520, which applies to earnings up to, but not including, the month you reach full retirement age.

How much benefit is withheld if you exceed the annual earnings limit?

If you're under full retirement age, $1 in benefits is withheld for every $2 of earnings in excess of the annual exempt amount.

In the year you reach full retirement age, $1 in benefits is withheld for every $3 of earnings in excess of the special exempt amount that applies that year, but only counting money earned before the month you reach full retirement age.

What kinds of earnings may affect your benefit?

Earnings that might reduce your benefit

• Wages you earned as an employee (counted for the taxable year they're earned)
• Net earnings from self-employment (usually counted in the year earnings are received)
• Other types of work-related income, such as bonuses, commissions, and fees

Earnings that won't reduce your benefit

• Pensions and retirement pay
• Workers' compensation and unemployment compensation benefits
• Prize winnings from contests, unless part of a salesperson's wage structure, or entering contests is your "business"
• Tips that are less than $20 a month
• Payments from individual retirement accounts (IRAs) and Keogh plans
• Investment income
• Income earned in or after the month you reach full retirement age

Other types of earnings may affect your benefit. If you have additional questions about how the Social Security Administration defines earnings, contact the SSA at (800) 772-1213.

Which benefits may be affected by excess earnings?

Your own retirement benefit

Your Social Security retirement benefit may be reduced if you earn income over the retirement earnings test exempt amount.

Benefits paid to your spouse or child

If you have retired and your spouse and/or child receives benefits based on your Social Security record, any excess earnings you have may reduce their benefits. In addition, any excess earnings they have may reduce their own benefits but not your benefit.

Benefits paid to your survivors

If you die and a member of your family receives a survivor benefit, that benefit may be reduced if the family member earns money in excess of the retirement test exempt amount.

The earnings test is different in the first year of retirement

Earnings from an employer

In the first year of retirement, the earnings test is applied differently. Normally, the earnings test is based on the amount of income you earned annually; however, in the first year of retirement, the earnings test can be based on the amount of income you earned monthly, if that would benefit you. You can receive a full Social Security benefit check for any whole month in which your earnings don't exceed 1/12th of the annual exempt amount.

Earnings from self-employment

If you're self-employed, the SSA also considers whether you perform substantial services in your business. You will receive full benefits for any month you're not substantially self-employed. In general, you're considered to be substantially self-employed if you worked as a self-employed person more than 45 hours in one month. If you work less than 15 hours in one month, you will not be considered substantially self-employed, and you probably will receive your full retirement benefit for that month. If you work between 15 hours and 45 hours a month, you may or may not be considered substantially self-employed by the SSA, and your retirement benefit may be affected.

Questions & Answers

How does the SSA know how much you earn after you retire?

The SSA knows how much you earn because you are required to estimate your earnings when you apply for Social Security benefits. Later, the SSA will get information about your earnings from your IRS W-2 form (submitted annually by your employer) or, if you are self-employed, from your annual income tax return. The SSA also may ask you to send an earnings estimate annually. In addition, if you think the earnings used to calculate your benefit may be incorrect, contact the SSA at (800) 772-1213 so that your benefit can be accurately calculated.

If you receive Social Security retirement benefits based on your ex-spouse's Social Security earnings record, will your benefit be reduced if your ex-spouse's benefit is reduced due to excess earnings?

No. If you've been divorced for more than two years, your benefits will not be reduced if your ex-spouse has excess earnings. The only way your benefit will be reduced is if you have excess earnings.