Because Social Security retirement benefits plus savings and other investments are often not enough to live on comfortably, many people keep working for at least a few years after they claim Social Security early retirement benefits. Other people keep their jobs or take new ones to stay active and involved in the world of work.
If you keep working at a high enough salary, you may increase your lifetime earnings average, thereby slightly increasing your retirement benefits for the years to come. But if you claim early retirement benefits and continue to work, be aware that the money you earn over a certain amount each year may reduce your Social Security retirement benefits (until you reach full retirement age). Such a reduction in benefits applies only to the years you are working. It has no permanent effect on the amount of benefits you’ll receive in future years (and you can even make back some of the reduction in future years—more on this below).
Until you reach full retirement age, Social Security will subtract money from your retirement check if you exceed a certain amount of earned income for the year. For the year 2021, this limit on earned income is $18,960 ($1,580 per month). The amount goes up each year. If you are collecting Social Security retirement benefits before full retirement age, your benefits are reduced by $1 for every $2 you earn over the limit. Once you reach full retirement age, there is no limit on the amount of money you may earn and still receive your full Social Security retirement benefit.
Social Security does not reduce each monthly check by a small amount, unfortunately. Instead, the agency may withhold several months' entire checks until the reduction is paid off. (The way Social Security reduces your benefits is actually very complicated. For the details, read Social Security's pamphlet on "How Work Affects Your Benefits." You can also use Social Security's earnings test calculator to see how much your reduction will be and when Social Security will withhold your benefits.)
Note that if you are working and you lose your job, you may collect unemployment benefits (assuming you otherwise qualify for them) even though you are also collecting your Social Security retirement benefits.
If you are already receiving your retirement benefits, a special higher earnings limit applies in the calendar year you turn your full retirement age (66 for folks retiring today). If you will reach full retirement age in 2021, you can earn up to $4,210 per month without losing any of your benefits, up until the month you turn 66. But for every $3 you earn over that amount in any month, you will lose $1 in Social Security benefits. Beginning in the month you reach full retirement age, you become eligible to earn any amount without penalty.
If you are self-employed, you may receive full benefits for any month during this first year in which you did not perform what Social Security considers “substantial services.” The usual test for whether you worked substantial services is whether you worked in your business more than 45 hours during the month (or between 15 and 45 hours in a highly skilled occupation). In other words, if you work in your business more than 45 hours in a month, Social Security may reduce your benefit.
The Social Security Administration bases its benefit calculations on earnings reported on W-2 forms and on self-employment tax payments. Most individuals are not required to send in an estimate of earnings.
However, the Social Security Administration does request earnings estimates from some recipients: those with substantial self-employment income or those whose reported earnings have varied widely from month to month, including people who work on commission. Toward the end of each year, Social Security sends those people a form asking for an earnings estimate for the following year. The agency uses the information to calculate benefits for the first months of the following year. It will then adjust the amounts, if necessary, after it receives actual W-2 or self-employment tax information in the current year.
Once a beneficiary reaches full retirement age, his or her income will no longer be checked. Because there is no Social Security limit on how much a person can earn after reaching full retirement age, there is nothing to report.
The amounts of early retirement benefits you lose as a setoff against your earnings are not necessarily gone forever. When you reach full retirement age, Social Security will recalculate upward the amount of your benefits to take into account the amounts you lost because of the earned income rule. The lost amounts will be made up only partially, however, a little bit each year. It will take up to 15 years to completely recoup your lost benefits. And remember, none of this readjustment will change the permanent percentage reduction in your benefits that was calculated when you claimed early retirement benefits (the early retirement penalty).
To learn more about collecting Social Security benefits, get Nolo's book, Social Security, Medicare, & Government Pensions: Get the Most Out of Your Retirement & Medical Benefits.