The Social Security Administration has specific rules for collecting Social Security when you retire.
The Social Security first-year rule, also known as the retirement earnings test, is a provision that affects individuals who claim Social Security retirement benefits before reaching their full retirement age (FRA), which is typically between 66 and 67, depending on the year of birth, and continue working.
A specific rule applies to earnings for one year, typically the first year of retirement, when a person who is not yet of full retirement age retires in the middle of the year and has already earned more than the yearly earnings limit. Under the first year of retirement rule, if your wages are below the monthly limit during any month you are retired, you are eligible to collect your full Social Security payment. It is also important to know that you cannot provide substantial self-employment services during these months.
The Social Security earnings limit
To understand the first year of retirement rule, it is helpful to understand the earnings limit, which is the maximum amount you are allowed to earn and still receive your full Social Security benefit if you elect to withdraw before you reach your full retirement age. The earnings limit changes each year. When you turn 62, you can start receiving your Social Security benefits, but important restrictions will be imposed until you reach your full retirement age. Your full retirement age is based on your birth year.
Delayed retirement credits
It is important to note that if you delay taking your retirement benefits beyond your full retirement age, your benefit amount increases because you become eligible for delayed retirement credits. With the delayed retirement credit, you receive a specific percentage added to your benefit each month that you delay taking your benefits past your full retirement age up until you reach 70.
Social Security first year of retirement rule
Social Security caps the amount of income you can earn and still be allowed to receive your full Social Security retirement benefits while still working. The Social Security Administration is allowed to pay full Social Security benefits for any whole month that they consider you retired, regardless of your annual earnings, as long as you:
· Are under the full retirement age for the full 2023 year, you are considered to have reached the full retirement age for the entire 2023 year if your earnings for any one-month total $1,770 or less and you did not engage in “substantial self-employment” activities.
· Reaching full retirement age in 2023, you are deemed retired in any month you earned $4,710 or less and did not engage in “substantial self-employment” activities.
The Social Security Administration defines “substantial services in self-employment” as working more than 45 hours a month for a business or 15-45 hours for a business in a highly skilled occupation.
If you are younger than the full retirement age and your earnings exceed the yearly earnings limit, the Social Security administration reduces the amount of the benefit you receive. The Social Security Administration determines the amount they will deduct by deducting $1 from your benefit payments for every $2 you earn beyond the annual limit. The Annual limit for 2023 is $21,240.
It’s important to note that this reduction is temporary and applies only to earnings in the year you first claim benefits. Once you reach your FRA, the reduction no longer applies, and your benefits are recalculated to account for any withheld benefits. In the year you reach full retirement age, the Social Security Administration deducts $1 in benefits for every $3 you earn above a different limit. In 2023, the limit on earnings is $56,520. The Social Security Administration only counts the money you earn up to the month before you reach your full retirement age, not your earnings for the whole year.
The Social Security Administration developed the first year of retirement rule to modify the earnings limit to account for individuals who retire part way through a year but have earned more than the annual earnings limit.