Working at 63? The $24,480 Line That Quietly Claws Back Your Social Security

For many seniors, their retirement plan includes
working while collecting Social Security. This may be because they want
to stay busy or because they don’t have enough money invested and need to
supplement Social Security with a paycheck.

Unfortunately, if you plan to hold a job at 63 and receive Social Security
benefits at the same time, you should be aware of a potential snag.
Specifically, you may lose some of your Social Security payments.

While the forfeiture of benefits is temporary, it will take time to get back all
the benefits you don’t receive. And if you hoped to double-dip and get both Social
Security and a paycheck, that may not be possible to the extent you think.

That’s because of something called the retirement earnings test and the $24,480
bright-line rule it puts in place.

Find Out: 13 moves seniors could benefit from but often forget about.

What is the Social Security retirement earnings test?

The retirement earnings test is a rule that applies to Social Security
beneficiaries who both work and collect benefits at the same time. The test
applies to you if you are under your full retirement age.

Under Social Security’s rules, you could earn as much income as you want while
collecting benefits if you have reached your full retirement age. FRA
is 67 for anyone born in 1960 or after. If you haven’t reached FRA yet and earn
too much income, you would have some of your Social Security checks withheld.

In fact, depending on just how much you earn, the test could mean that your
benefits disappear entirely.

Shopping for cheaper auto insurance? Enter your zip code here to get started.

What income counts towards the test?

The retirement earnings test is, as the name suggests, a test based on what you
earn.

This means that wages and net earnings from self-employment count in determining
if you have met the threshold when your benefits are affected. Bonuses,
commissions, and vacation pay could also count.

Income from a pension, investments, and retirement withdrawals aren’t factored
in.

How does the earnings test affect your benefits?

When you work and collect Social Security, the retirement earnings test sets an
upper limit on the amount you could earn before your benefits are impacted.

In 2026, if you don’t reach your full retirement age for the entire year,
that limit is $24,480. If you do reach FRA at some point during the year, you
are subject to a higher limit of $65,160. The limit applies only until you have
hit FRA, at which point you could work as much as you want.

If you’re working at age 63, then you won’t hit FRA all year. The $24,480
threshold applies to you, and you could expect the Social Security Administration
to start to claw back some of your benefits once your earnings are projected to
hit this number.

Save Money: Things to cut when living on retirement (many people ignore #11)

How much of your benefits do you lose?

Once you have reached your $24,480 limit, Social Security begins withholding $1
in benefits for every $2 above that threshold. So, if you earned $26,000, you
would be $1,520 above that limit. Social Security would withhold $760 from your
benefits because of your excess earnings.

This test results in you losing more benefits than the test that applies if
you’d reach FRA during the year. If you are subject to the $65,160 limit, you
only lose $1 in benefits for every $3 above the higher threshold.

Either way, the SSA typically withholds the full amount you lose upfront, so
you could lose entire checks you otherwise would have collected. This is what
makes the retirement earnings test such a problem for many seniors. If you
counted on collecting both a paycheck and Social Security, that may not be
possible.

When do you get the money back if you lose your Social Security checks?

The good news is, you don’t lose the money forever if the retirement earnings
test results in a reduced benefit. Your monthly Social Security payment is
recalculated at your full retirement age to account for the benefits that you
missed out on.

So, for example, if you did not receive six months worth of benefits because of
the test, your Social Security benefit would be recalculated at your full
retirement age, and you would be credited back six months worth of early-filing
penalties.

Since those penalties would no longer reduce your standard benefit, you’ll
collect more money in each check after you’ve reached your FRA.

You don’t get back the withheld money in a lump sum. You get it back a little
over time in the form of your higher monthly benefit caused by eliminating some
early-filing penalties. This means it could take you a while to break even for
missed benefits.

What do you need to do if you’re working and collecting Social
Security?

You are required to report your earnings so your benefits are adjusted
accordingly. If you don’t and Social Security overpays you, you’ll eventually be expected to pay that overpayment back.

You also need to plan for the loss of your benefits once you cross the $24,480
threshold. Since entire checks could disappear instead of a little being taken off each month, this could feel like a big hit and make it hard to cover your bills if you weren’t prepared.

Retire like the rich: 14 ways you could build wealth in your 50s.

Bottom line

Failing to understand the retirement earnings test is one of the biggest financial mistakes
you could make when preparing for retirement. You don’t want to be caught off
guard and end up with thousands of dollars less than you expected each month
because your benefits disappear.

As you decide how much to work, understand what this rule means for you. The
amount you work might also change over time to adjust for wage growth, so be sure
to check the limit each year. That way, you could set a realistic budget based on
combined income from your paychecks and Social Security and make sure you’re
able to make ends meet.

More from FinanceBuzz: