Confusing Social Security Rule Could Strip Retirees of Benefits

A lot of people specifically sign up for Social Security so that they no longer have to work. If you have a substantial IRA or 401(k) and can supplement it with monthly Social Security checks, that may be enough money for you to live a comfortable lifestyle.

But unless you have savings, you may find that Social Security alone isn’t enough. The average monthly benefit among retirees today is only about $2,076, which amounts to roughly $25,000 on an annual basis. Even with minimal expenses, it’s hard to get by on Social Security alone.

If you need to work to supplement your Social Security, you should know that while doing so is allowed, you may be subject to an earnings test, depending on your age. And you may also risk having benefits withheld, depending on how much money you make.

How Social Security’s earnings test works

Social Security’s earnings test tends to be confusing to seniors. But it’s important to understand how it works in case it ends up applying to you, since it could cause you to lose out on benefits temporarily.

Let’s get one thing out of the way first. Social Security’s earnings test only applies to seniors who are collecting benefits before having reached full retirement age (FRA). Once FRA arrives, you can earn any amount of money from a job without risking having benefits withheld.

Next, Social Security’s earnings test only applies to income from wages, whether it’s a consulting contract, a part-time role, or freelance work. It does not apply to investment income like dividends, nor does it apply to withdrawals from retirement savings.

If you’re collecting Social Security and haven’t reached FRA, you’ll need to keep your income from a job below a certain level to avoid having benefits withheld. That level changes yearly.

This year, the earnings test threshold is $24,480. But for people who will reach FRA by the end of 2026, it’s $65,160.

Exceeding the earnings test threshold causes benefits to be withheld, but not forfeited. Note the distinction.

If you have benefits withheld under the earnings test, once FRA arrives, your monthly payments will be recalculated. You’ll get your withheld benefits back in the form of larger monthly checks.

Here’s the confusing part, though. If you claim Social Security before reaching FRA, you’ll shrink your benefits permanently by virtue of an early filing. This holds true whether you opt to work or not.

But even if you have most or all of your benefits withheld for earning too much, the reduction you face due to filing early is permanent. So if you plan to work a lot, you may want to wait on Social Security if your FRA hasn’t arrived yet.

Make sure you know the rules

It can be beneficial to work while receiving Social Security. And you get some leeway to earn a decent chunk of money before withheld benefits come into play.

But if you’re going to work while on Social Security and you haven’t reached FRA, make sure you know what the earnings test limits are and what the rules entail. That way, you can avoid unwanted surprises.