Close Close
ThinkAdvisor

Retirement Planning > Social Security > Claiming Strategies

Everything You Need to Know About Social Security’s Retirement Earnings Test

X
Your article was successfully shared with the contacts you provided.

What You Need to Know

  • The retirement earnings test limits the amount of work-related income a person can have while claiming benefits before full retirement age.
  • Once clients have reached full retirement age, they can have unlimited income and still claim full benefits.
  • The monthly earnings test can only help a client; it can’t hurt one that would otherwise be under the annual earnings test amount.

If you have clients making Social Security claiming decisions, you’ve likely heard them lament their belief that they can’t claim because they “make too much.” The root of the complaint is the retirement earnings test, which limits the amount of work-related income a person can have and still claim benefits before reaching full retirement age.

Once they have reached full retirement age, however, they can have an unlimited amount of income and still claim full benefits. Understanding the earnings test rules can allow you to tailor claiming strategies, even for those who at first glance may seem to have income more than the earnings test exempt amounts. 

There are two earnings tests: the annual earnings test and the monthly earnings test. There are two sets of exempt amount thresholds for each: one for the year the client reaches full retirement age and one for all years prior. 

Annual Earnings Test

Different thresholds are used to determine if the client is subject to the annual earnings test. In the years leading up to full retirement age, the threshold is lower. In 2022, the annual exempt amount is $19,560. For every $2 of earnings that exceed $19,560, the Social Security Administration withholds $1 in benefits.

For those who reach full retirement age this year, the annual exempt amount is $51,960. But this applies only to earnings made in the months prior to the month the client attains full retirement age. For every $3 of earnings that exceed the $51,960 threshold, the Social Security Administration will withhold $1 in benefits. Earnings received in the month the client reaches full retirement age are not counted toward the test.

Monthly Earnings Test

A person can claim benefits even if they are over the annual earnings test threshold for the year by using the monthly earnings test. This is particularly valuable in the year of retirement or in a year with a significant work change. The monthly test can be used for only one year. 

Let’s say you have a client who retired in May at age 62½ who earned $10,000 per month. They had earned $50,000 by the end of May, when they retired. The annual earnings test would eliminate their benefit for the year; the monthly earnings test, however, would allow them to claim a benefit for each month that their earned income is below 1/12 of the annual threshold amount. If you have any clients planning to retire midyear, take a close look at the monthly earnings test. 

Interaction Between the Monthly and Annual Earnings Tests

If the same scenario occurred in the year the client reached full retirement age, the client could claim in January, using the annual earnings test with no earnings test penalty. Although the months from January to May were over the monthly earnings test amount, the total earnings for the year were below the much higher threshold for the year the client reaches full retirement age. In other words, the monthly earnings test can only help a client; it can’t hurt a client that would otherwise be under the annual earnings test amount.

To take this situation a step further, assume the client reached full retirement age in April. The client could earn $51,960, or $17,320 per month, in the first three months and still claim in January with no earnings test penalty.

Adjustment at Full Retirement Age

Even when benefits are withheld due to the earnings test, they are not completely lost. Once the client reaches full retirement age, benefits will be increased to account for the number of months that they did not receive a benefit.

For example, if the client’s full retirement age is 66 and they filed for benefits at age 62, they received a reduction in benefits for taking benefits 48 months early. If 12 payments are withheld due to the earnings test, the monthly benefit amount will be adjusted at full retirement age and it will be as if the client elected at age 63, or 36 months early.

What Income Counts?

Everyone knows that work income is included in the earnings test, but other income streams may be subject as well. For instance, clients who are self-employed are subject to the earnings test based on the service they provide, rather than profit or loss. Clients who earn royalties may also be subject to the earnings test depending on the year of copyright and if they’ve attained full retirement age. Looking at every individual income stream will help you determine the full impact of the earnings test. 

Other Considerations

Sometimes it makes sense to claim Social Security, even if you’re subject to a partial earnings test. 

Consider this scenario: Sam and Terry are a married couple. Sam is 15 years older than Terry. Terry is still working, but not earning enough that the earnings test will wipe out everything for the year. Terry files for benefits. The Social Security Administration withholds the first several months of benefits, but because Terry doesn’t make that much over the threshold, the Social Security Administration pays out benefits for several months of the year.

Remember that the reduced benefit will last only until the first death in the household, at which time the larger benefit in the household will become the survivor benefit. For this reason, when you have clients with a large life expectancy gap, and an earnings test penalty that reduces but doesn’t eliminate benefits for the lower wage earner, the lower wage earner should often claim early.

For the average retiree, the rules and regulations surrounding the earnings test can be complex and confusing. Financial advisors can deliver significant value by helping clients understand how the earnings test may affect their retirement and by creating smart retirement income strategies that account for the test. 


Joe Elsasser is the founder and president of Covisum, a financial technology company focused on creating software that improves lives through better financial decisions. Covisum helps financial advisors serving mass-affluent clients in or near retirement and powers some of the nation’s largest financial planning institutions.