Understanding the Social Security Earnings Test
Many people assume that once they start receiving Social Security benefits, they must stop working or face penalties. However, the rules are more nuanced, focusing on your earned income rather than the number of hours you work. The primary factor is your age relative to your full retirement age (FRA).
If you were born in 1960 or later, your full retirement age is 67. This means retiring at 65 places you squarely within the pre-FRA period, where the earnings test applies.
Working Before Your Full Retirement Age
For those who have not yet reached their FRA, the Social Security Administration (SSA) imposes an annual earnings limit. For 2025, that limit is $23,400. Here’s how it works:
- Benefit Reduction: If you earn more than the annual limit, the SSA will temporarily deduct $1 from your benefits for every $2 you earn over that limit.
- Income, Not Hours: The test is based on your total earned income, including wages and net self-employment earnings. Investment income, pensions, and other government benefits are not counted toward this limit.
- Temporary Withholding: Any benefits withheld are not permanently lost. When you eventually reach your full retirement age, the SSA recalculates your benefit to give you credit for the months when benefits were reduced.
The Special Rules for the Year You Reach FRA
In the specific calendar year you reach your full retirement age, the earnings limit is much higher, and the rules are different. For 2025, this limit is $62,160, and it only applies to earnings made in the months before your birthday month. For every $3 you earn above this limit, $1 is withheld from your benefits. Once you reach your FRA month, the earnings test disappears entirely.
Working at or After Your Full Retirement Age
Starting in the month you reach your full retirement age, you can work and earn as much as you want without having your Social Security benefits reduced. This is a key distinction for anyone retiring at age 65 who will eventually reach their FRA. Until then, you must be mindful of the earnings limits.
The Calculation: How Income Affects Hours
To estimate how many hours you can work, you need to consider your hourly wage. The hours per week are not fixed because the limit is based on your total annual income. For example, if you earn $20 per hour and the 2025 earnings limit is $23,400, you could work up to 1,170 hours in the year without affecting your benefits ($23,400 / $20 = 1,170 hours). This translates to approximately 22.5 hours per week (1,170 hours / 52 weeks). This calculation is a simple average and can be managed month-to-month, but it provides a useful guideline.
More Than Just Money: Additional Considerations
Retiring at 65 and continuing to work involves more than just understanding Social Security rules. Here are other factors to consider:
- Taxes: Earned income is still taxable, and it can also increase the percentage of your Social Security benefits that are subject to federal income tax. Depending on your combined income, up to 85% of your Social Security benefits could be taxed.
- Medicare Premiums: Higher income can potentially increase your Medicare Part B and Part D premiums through the Income-Related Monthly Adjustment Amount (IRMAA). This is a tiered system where higher income levels result in higher premiums.
- Continuing Coverage: Many retirees work part-time to maintain employer-provided health insurance until they transition to Medicare at age 65. If you decide to keep working past 65, your employer’s coverage may be primary, and Medicare secondary. It is crucial to coordinate with your employer to avoid a coverage gap or penalties for delaying Medicare Part B enrollment. For more information on this, the official Social Security Administration website offers a range of publications on the topic.
- Mental and Emotional Health: Working part-time provides many non-financial benefits, such as social engagement, a sense of purpose, and reduced stress. These benefits contribute positively to healthy aging and overall well-being.
The Impact of Working Before and After FRA: A Comparison
| Feature | Working Before FRA (e.g., at 65) | Working at or After FRA (e.g., at 67) |
|---|---|---|
| Annual Earnings Limit | Applies ($23,400 in 2025) | No limit |
| Hours per Week | Determined by your income and the earnings limit | Unlimited |
| Benefit Reduction | Temporary reduction based on earnings over the limit | None |
| Recalculation | Benefits are recalculated at FRA to increase monthly payments | N/A |
| Tax Implications | Earned income may increase the taxable portion of benefits | Earned income may increase the taxable portion of benefits |
| Medicare Premiums (IRMAA) | Potential for higher premiums with higher income | Potential for higher premiums with higher income |
Making the Right Choice for Your Retirement
Determining the right balance between working and receiving benefits after retiring at 65 is a personal decision that requires careful planning. While there is no strict hourly limit, the Social Security earnings test imposes income restrictions until you reach your full retirement age. The best strategy is to balance your financial needs, the impact on your Social Security benefits, and your personal desire for continued work and engagement. By understanding the rules and planning ahead, you can make the most of this new chapter in your life.
