Understanding Social Security's Early Retirement and the Earnings Test
Starting your Social Security retirement benefits at age 62—the earliest age of eligibility—while continuing to work can seem like the best of both worlds, providing both an income stream and an extra boost to your savings. However, the Social Security Administration (SSA) has specific rules for those who claim benefits before reaching their full retirement age (FRA). For anyone born in 1960 or later, the FRA is 67. Until you reach your FRA, your benefits are subject to an annual earnings test.
If your earnings from employment or self-employment exceed a set limit, the SSA will temporarily withhold some of your benefits. The earnings limit is adjusted annually. For 2025, if you are under your FRA for the entire year, the limit is $23,400. For every $2 you earn over that limit, $1 will be deducted from your benefits. This can significantly impact the amount you actually receive each month, especially if you are working a full-time job.
The temporary reduction explained
The most important detail to remember is that this isn't a permanent loss of benefits. Any benefits the SSA withholds due to excess earnings are not gone forever. When you reach your full retirement age, your benefit amount will be recalculated to give you credit for the months in which benefits were withheld. This results in a higher monthly payment for the rest of your life. So, while your checks might be smaller initially, the money is not lost.
- Permanent benefit reduction: By claiming at age 62, your monthly benefit is already permanently reduced by up to 30% compared to waiting until your FRA.
- Temporary earnings test reduction: The extra reduction from the earnings test is temporary and is credited back to you in the form of a higher payment at your FRA.
- Highest 35 years: Your Social Security benefit is based on your 35 highest-earning years. If continuing to work full-time at age 62 pushes a higher-earning year into your top 35, it could further increase your eventual benefit amount.
Financial and practical considerations
Deciding to retire at 62 while working full-time is a complex financial decision with multiple factors to consider beyond just the Social Security rules. A full-time salary could significantly exceed the annual earnings limit, meaning most, if not all, of your early Social Security benefits will be withheld.
| Consideration | Impact at Age 62 (Working Full-Time) | Impact at Full Retirement Age (67) |
|---|---|---|
| Monthly Social Security Benefit | Reduced permanently for claiming early; potentially withheld entirely due to earnings test. | Recalculated to account for earlier withheld benefits, resulting in a higher monthly payment. No earnings test applies, so you can earn any amount. |
| Tax Implications | Your combined income (including wages, investment income, and Social Security) may result in up to 85% of your benefits being taxable. | Benefits may still be taxable depending on your income, but the earnings test penalty no longer applies. |
| Healthcare Coverage | Ineligible for Medicare until age 65. Must rely on employer-sponsored health insurance, COBRA, or an Affordable Care Act (ACA) plan to bridge the gap. | Eligible for Medicare at 65. If still working, you may be able to delay enrolling in Part B if covered by an employer group plan, but check with your benefits administrator. |
| Retirement Savings | Additional income allows you to keep savings invested longer, potentially enabling higher growth through compounding. You can also make catch-up contributions to 401(k)s and IRAs. | Continued investment growth is possible, but without earned income, you begin drawing down savings more rapidly. |
What to do if you retire mid-year
If you retire mid-year, perhaps after earning a high salary for the first part of the year, the SSA has a special rule for your first year of retirement. Instead of just using the annual earnings limit, they use a monthly test for that year. This allows you to receive a full benefit check for any month you are considered retired, regardless of your yearly earnings.
For example, if you retire in October, even if you earned more than the annual limit in the first nine months, you can receive your full Social Security benefit for October, November, and December, provided your earnings in those specific months are below the monthly limit ($1,950 per month in 2025). This special rule helps to avoid immediate, heavy penalties for high earnings in the months before you stop working. After your first year, however, only the standard annual limit applies until you reach your FRA.
Final considerations for a flexible retirement
For many, retiring at 62 and continuing to work full-time is an excellent way to secure their long-term financial future. It allows retirement savings to grow, increases future Social Security benefits, and provides a continuous stream of income. However, it's crucial to weigh the immediate and temporary reduction in Social Security payments against the advantages of a full-time salary. Consulting a financial advisor and using the SSA's online tools can help you model your specific scenario. The flexibility of claiming early while working allows for a personalized approach to retirement that maximizes income and financial stability.
Conclusion
Ultimately, the decision to claim Social Security at age 62 while working full-time is a strategic one, not a prohibited one. While your early benefits will be reduced, the amount withheld is not permanently lost and will be credited back to you at your full retirement age. Continuing to work offers the distinct advantage of bolstering your financial security through higher savings and potentially larger future Social Security payments. By carefully considering the impact on benefits, taxes, and healthcare coverage, you can make an informed decision that aligns with your personal financial goals. The flexibility of this approach allows you to shape a retirement that is financially sound and personally fulfilling.
Disclaimer: This article is for informational purposes only and does not constitute financial or tax advice. Consult a qualified professional for personalized advice.
