Social Security Earnings Limits Explained

Even if you have significant assets, your Social Security benefits are likely to play a role in your retirement planning. According to the Social Security Administration, nearly 90 percent of people age 65 and older receive Social Security benefits.

When planning what age to begin taking Social Security benefits, you should consider how your earnings affect the benefits you’ll receive. Your benefits can be reduced for two reasons: if you take them before reaching full retirement age — which depends on when you were born —  or if you earn too much money. If you factor your income, potential Social Security benefits, cost of living and other considerations into your retirement plan in advance, you can maximize your retirement income.

Income Rules After Reaching Full Retirement Age

Beginning in the month you attain full retirement age, you can work to your heart’s content without having your Social Security benefits reduced because the Social Security limit doesn’t apply to you. If you were born from 1943 through 1954, your full retirement age is 66 years old.

Each year after 1954 increases the retirement age by two months until the full retirement age reaches 67 years old if you were born in 1960 or later. For example, if you were born in 1956, your full retirement age is 66 years and four months.

Read: How Your Retirement Age Impacts Your Social Security Benefits

How Much Benefits Are Reduced If You’re Under Full Retirement Age

If you elect to start taking Social Security benefits prior to reaching full retirement age, your benefits will be reduced if you earn more than the income limits. These limits adjust annually for inflation.

Your benefits will be reduced by $1 for every $2 you earn in excess of the annual limits if you are under the full retirement age for the entire calendar year. If you reach full retirement age during the calendar year, your benefit only goes down by $1 for every $3 you earn over the annual limit in the months prior to attaining full retirement age.

The SSA only looks at income you earn, such as salaries, bonuses, and net income from self-employment, when determining a reduction to your benefits. You are not penalized for unearned income, such as capital gains, pensions or interest. So, if you plan to live off of dividends and distributions from your other retirement savings, you can also still receive your full Social Security benefits.

Related: Why Financial Independence Is the Key to Retiring Early

Special Rule for Recent Retirees

The SSA has a special rule for the first year of retirement for people who retire in the middle of the calendar year. The SSA will pay you your full Social Security check for any month you are considered “retired.” It defines you as retired for any given month if you meet one, not both, of the following sets of criteria:

• You will reach full retirement age during the year, your earnings for the month equal $3,740 or less, and you did not perform substantial services in self-employment.
• You will be under full retirement age for the remainder of the calendar year, your earnings are $1,410 or less, and you did not perform substantial services in self-employment.

“Substantial services in self-employment” means you worked more than 45 hours a month for a business or between 15 and 45 hours for a business in a highly skilled occupation.

How to Budget for the Social Security Earnings Limit

If you plan to start taking Social Security while still working, your budget should reflect your reduced Social Security benefits because of your earned income. For example, if you plan to begin taking Social Security at age 62 but will keep working and expect to earn $5,000 over the annual limit, your Social Security benefits will be reduced by $2,500. When you reach full retirement age, the SSA will recalculate your benefit to give you credit for the amounts withheld.

Up Next: How to Apply for Social Security