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

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.