Retirement planning is tricky. On one hand, you want to make sure you save enough to enjoy yourself for a long, happy life once you stop working — and that could mean that you need decades of secure income. On the other hand, you also have dreams and obligations right now, and you need to balance your savings goals with real life.

Add to that all the moving parts of retirement planning — Social Security, stock market changes, inflation, and taxes — and you can be forgiven if your head is spinning.

But we’re here to help.

One important issue that many people don’t think about until it’s too late? The Social Security earnings test. Depending on when you choose to retire, your income could be limited. Here’s what you need to know to make the most of your social security payouts.

Social Security Basics

If you haven’t given much thought to Social Security, it’s worth taking a moment to remind yourself of what you’re entitled to. Social Security retirement benefits cover any American who has earned enough work credits by paying Social Security taxes for roughly 10 years over their lifetime. The amount of retirement benefits you can receive is based on a percentage of the total you’ve paid into the system over the years, though this amount varies depending on your age when you choose to retire and begin collecting.

You can begin receiving benefits as young as age 62, though this will result in a reduced monthly payout for the rest of your life. Full retirement age is anywhere from 66 to 67, depending on when you were born. And if you can wait even longer, your benefits will continue to increase until age 70. Your monthly benefit at age 70 could be nearly double what it is at age 62, so it’s important to use a Social Security calculator to understand how your retirement age will affect your income.

But What if You Keep Working?

For many people, working is a passion that they don’t intend to give up. For others, additional income in their sixties and seventies will be crucial to helping them meet their retirement goals. But choosing to work once you collect Social Security can impact your payments: Work too much, and your Social Security check could be much smaller than you anticipated, throwing a wrench into your retirement income and leaving you short on cash for living expenses.

The Social Security Earnings Test

To prevent people from depleting the Social Security system while still working, the law limits the benefits people are entitled to if they retire early — that is, before their full retirement age (whether that’s 66 or 67). So if you pick up an extra job after you reach full retirement age, you will still earn your full Social Security benefits on top of your extra earned income.

But if you choose to collect Social Security before your full retirement age, you’re subject to the earnings limit. Each year, the earnings limit rises to account for inflation. In 2020, the income limit is $18,240. This means that if you are not at the full retirement age, you can earn up to $18,240 and still get your full benefits. Go over that amount, and the SSA reduces your benefits.

The calculations for reduced benefits are complex. If you will not reach your full retirement age in 2020, and you earn more than $18,240, your benefits will be reduced by $1 for every $2 over the limit you go. If you will reach full retirement age in 2020, you’ll lose $1 for every $3 over the limit you go.

There is also a special rule about the year in which you retire: Your earnings test only begins in the months you have collected Social Security, so that all of your pre-retirement work income doesn’t count against you for the limit. For example, if you retire from a lucrative career in July and then take a part-time job in August, you can receive your full benefits as long as your monthly earnings aren’t more than 1/12 of $18,240 ($1520 per month).

Tips for Working Around the Earnings Penalty

If you’re confused, you’re certainly not the first! This is a complex formula, and it’s definitely a good idea to run a few scenarios on the Earnings Test calculator to see how excess earnings could affect your benefits.

There are also some tried-and-true tactics for avoiding a nasty surprise when you open your Social Security check:

1. Hold off on collecting Social Security until you reach full retirement age (FRA). This allows you to completely avoid the earnings test and any penalty, as it only applies to people below FRA.
2. Consider withdrawing your Social Security application. If you’ve already applied for benefits but have changed your mind now that you know more about the earnings limit, you can withdraw your application within 12 months of submission. You can apply for benefits again later — ideally when you’re closer to FRA.
3. Track your income carefully. If you want to —or have to — work, track your hours to try to stay within the earnings limit if you can. If you need to cut back near the end of the year to avoid going over the limit, it may make sense to do so.
4. Consider other retirement income instead of working. If you have investments that can replace the income from extra work before you reach FRA, it might make sense to use those instead. For example, you can pull principal from a Roth IRA with no penalty at any age.
5. Plan ahead! Working with an advisor who can run through every scenario will give you peace of mind and help you come up with a plan that maximizes your Social Security while preserving your retirement savings for the long haul.

Need help getting started? Weighing the pros and cons of working through retirement is a big question, and we’ve got answers. Contact us today to set up a consultation to get a clear view of your personal retirement plan.