Around four in 10 older households receive income from work, according to Pew research. Pew Charitable Trusts also reports that a growing number of Americans are planning to work past the traditional retirement age.
Working during retirement is widely viewed as a good thing. It can help you stay busy, allow you to withdraw less from retirement plans, and just plain give you more money to spend. However, there is an unexpected downside many seniors may not be aware of that could end up costing them a fortune.
Specifically, the Social Security earnings test could mean you end up with far less Social Security income than you’re expecting. Here’s why.
The Social Security earnings test can mean a big loss of benefits if you earn too much
Social Security has an earnings test that applies if you claim benefits and you work before reaching your full retirement age (FRA).
After you have hit your FRA, you can work and earn as much as you’d like. But before this milestone, you lose:
- $1 for every $2 earned above $24,480 in 2026 if you won’t hit FRA all year
- $1 for every $3 earned above $65,160 if you will hit FRA sometime during the year, but haven’t yet.
The Social Security Administration will end up withholding entire benefit checks in some cases. This means if you earn too much, you may get no benefits at all, even if you have claimed your benefits already. If you were earning thousands of dollars in monthly Social Security checks, all of that money could disappear.
Your benefits are eventually recalculated — but the money comes back slowly over time
There’s some good news and some bad news about the forfeiture of benefits under Social Security’s earnings test. When your benefits are withheld, the money is not just gone forever. When you reach your FRA, the Social Security Administration recalculates benefits based on the benefits money that you didn’t collect. Your new monthly benefit goes up a little bit for each month that you didn’t receive a payment.
Unfortunately, it can take a long time to get back all of the money the Social Security withheld from you — often, over a decade of getting higher payments before you make up for the missed income. Plus, if you had counted on double-dipping and having a paycheck and Social Security in your later years, this plan is spoiled by the earnings test.
When you make your retirement plans, you need to be aware of these rules. It may still make sense to work. After all, you can still invest in your 401(k) or other retirement plan while you’re earning a paycheck, and you can preserve your savings. You may also benefit from those higher Social Security checks later if you live long enough.
Still, you must understand how your Social Security benefits will be affected by your decision to bring a big paycheck home. You should consider talking to a financial advisor about the impact of making too much money as a Social Security retiree so you can make informed choices about the work plan that’s best for you.
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