How Does The Earnings Test Work?

Jan 24 2017 - 6:45am

Larry, I'm confused on the earnings test. My DOB is 1-5-1952, if I retire this year (2017) @ 65 and still work, how much could I earn per month and not effect my benefits? I plan to retire in July and will have made about 35,000 this year at that point, It seems the earnings test doesn't do me any good because I don't reach FRA in this year. I miss it by 3or 4 days. I'm I correct on this?


The main thing you need to understand is that there are 2 separate earnings tests ( available in the first year of Social Security entitlement. The calendar year test says that if you earn more than $16,920 this year, $1 of your benefits must be withheld for each $2 that you earn in excess of $16,920. The monthly test says that you can be paid for any month in which you earn less than $1,410, regardless of how much you earn in the rest of the year. Social Security will compare the 2 tests, and use whichever is more advantageous to you.

For example, say you retire in July and earn $35,000 up until then. As long as you don't earn more than $1,410 in any month after July, you could receive full payments starting with August based on the monthly test. Of course, your benefit rate would be reduced if you start drawing benefits prior to full retirement age (FRA).

Continuing this example using the calendar year test, if you earn $35,000 this year Social Security would withhold $9,040 from your benefits (i.e. ($35000 - $16920)/2). If your monthly benefit rate was $1500, Social Security would need to withhold a little over 6 months of benefits to recover the $9,040 withholding. The higher your monthly rate is, the fewer months of withholding that would be required. So, the calendar year test could be more advantageous than the monthly test, depending on your earnings and monthly benefit rate.

The maximization software available on this website is programmed to handle the earnings test, so you may want to consider running it in order to help you decide on the best time to file. The software may also be able to identify other filing options available to you that may be more advantageous.

Best, Jerry