Millions of Americans are choosing to work during retirement, driven by longer lifespans, vanishing pensions, and shrinking savings accounts.
Social Security’s retirement trust fund is now expected to become insolvent in 2032, one year sooner than program trustees forecast in 2025, adding urgency to retirement planning decisions.
A rule called the Retirement Earnings Test, or RET, has existed since Social Security began, yet it continues to catch older workers completely off guard each year.
About 61% of Social Security beneficiaries claim before reaching full retirement age, making them potentially subject to the earnings test without even realizing it.
“When people hear about the RET, they think it’s a tax. Then they see their Social Security check go down in size and they get mad,” said Jason Fichtner, executive director of the LIMRA Retirement Income Institute.
For those claiming between age 62 and full retirement age, Social Security withholds $1 for every $2 earned annually above $24,480 in employment income.
In the months immediately before a beneficiary’s full retirement age birth month, the withholding shifts to $1 for every $3 earned above $65,160, a slightly less punishing threshold.
The earnings test does not apply to investment income, pension payments, retirement account distributions, or annuities, only to wages and self-employment earnings.
A concrete example helps illustrate the impact: Sandy is 64, eligible for $2,800 monthly, and earns an $80,000 salary, according to Rob Moore, a registered Social Security analyst and owner of Get Moore Consulting in Indianapolis.
Because $27,760 would be withheld from her annual benefits under the formula, Social Security would send Sandy no money at all for ten months out of the year.
Critically, the withheld money is not permanently lost, a point many retirees fail to understand when they first encounter the rule.
“The word we use is ‘postponed,’ because the money doesn’t disappear,” said Stuart Ritter, retirement-insights director at T. Rowe Price.
At full retirement age, Social Security recalculates benefits and credits back early filing penalties for every month a check was withheld, permanently raising monthly payments going forward.
This recalculation can meaningfully reduce how much retirees must withdraw from a 401(k) or IRA in later years, improving long-term financial stability.
Eustache Clerveaux, a certified financial planner and partner at Fidare Wealth in White Plains, N.Y., said the decision on whether to work and claim early “comes down to cash flow.”
Taxes add another layer of complexity, since Social Security benefits become taxable once combined income exceeds $25,000 for single filers or $32,000 for married couples filing jointly.
Up to 85% of benefits can be taxed for single filers earning above $34,000 or married couples earning above $44,000, a threshold that has not been adjusted for inflation in decades.
“I think the Social Security claiming decision is the most important financial decision someone can make for their retirement,” Fichtner said.
Financial advisers strongly recommend consulting a financial planner or Social Security analyst before making any early claiming decision, particularly for those who intend to keep working.
Once a beneficiary reaches full retirement age, the earnings test disappears entirely, and any prior benefit reductions are recalculated upward, offering a meaningful financial recovery for those who planned ahead.
