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Anyone who collects Social Security benefits before full retirement age — including retired workers, their spouses, divorced spouses, survivors and minor dependent children — are subject to an earnings limitation that may reduce or wipe out their benefits. The earnings cap restrictions apply only to wages or salary from a job, not other forms of income, such as investments, pensions, government benefits or rental property.
In 2022, if you are younger than full retirement age for the entire year, you lose $1 in Social Security benefits for every $2 you earn over $19,560. The earnings cap is indexed to inflation and increases in any year where there is a cost-of-living (COLA) adjustment. If you work for someone else, only your wages count toward Social Security’s earnings limits. If you’re self-employed, only your net earnings from self-employment count toward the earnings cap restrictions.
Let’s say you are 63 (elected to receive before FRA) and collect $1,800 per month in Social Security benefits for a total of $21,600 per year and continue to work or decide to go back to work. If you earn $40,000 from your job, that’s $20,440 over the earnings limit ($40,000 - $19,560), therefore, you would forfeit $10,220 in benefits ($20,440/2). The Social Security Administration will withhold your monthly benefits until the $10,220 is "paid back."
In the year you reach full retirement age, the rules get more generous. In the months leading up to your 66th birthday (born before 1954), you can earn up to $51,960 for the year in 2022— without sacrificing any Social Security benefits. If you earn more than that, you’ll lose $1 in benefits for every $3 over the earnings cap. In situations where people who retire in mid-year that have already earned more than the annual earnings limit, there is a special rule that applies to earnings for the first year of retirement. Under this rule, you can get a full Social Security check for any whole month you’re retired, regardless of your yearly earnings.
Once you reach full retirement age, however, the earnings cap disappears. Benefits lost to the earnings cap are not gone forever; they are merely deferred. For example, say you claimed retirement benefits at 62 and continued to work. And assume that over the next four years, you forfeited the equivalent of 24 months of Social Security benefits due to excess earnings. When you reach your full retirement age of 66, the Social Security Administration will recalculate your benefits as if you first claimed Social Security at 64 rather than 62.
Whichever claiming strategy is chosen, the earnings cap penalty would apply if benefits are received prior to reaching full retirement age - retirement, spousal, or survivor benefits. Carr Wealth Management, LLC, specializes in identifying factors in your financial situation that help make the optimal claiming decision. Please contact us to schedule a no-charge consultation or if you simply have a question about Social Security or other financially related planning areas.
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