Many retirees rely on Social Security as a fundamental source of income, yet the benefits received often represent only a portion of their previous earnings. On average, Social Security replaces around 40% of an individual's pre-retirement wages. While this percentage might appear reasonable, it frequently proves insufficient to cover the comprehensive costs of retirement living, including housing, utilities, groceries, and healthcare expenses.
In reality, even those who adopt frugal lifestyles may find their monthly Social Security payments stretched thin, necessitating additional income streams. A common approach is to engage in part-time work that supplements the benefits received from Social Security. Thankfully, the system permits earning income through employment while collecting benefits, but caution is advised due to the potential impact on the amount received.
Social Security's Earnings Test Explained
The Social Security Administration applies an earnings test to beneficiaries who continue working before reaching their full retirement age. This test sets limits on allowable earnings without affecting benefit payments. For individuals who have attained full retirement age, there are no restrictions on earnings; they can earn unlimited income with no reduction to their Social Security benefits.
However, before full retirement age, earning above certain thresholds triggers withholding of benefits. The Social Security earnings-test thresholds change annually to reflect economic conditions. For the year 2026, beneficiaries under full retirement age will face a deduction of $1 in benefits for every $2 earned above a limit of $24,480.
For those whose full retirement birthday occurs later in 2026, a different standard applies from the months before reaching that age. In such scenarios, the reduction adjusts to $1 withheld for every $3 earned over $65,160 until the month full retirement age is reached.
It is important to note that benefits withheld due to earnings exceeding these limits are not permanently lost. Upon attaining full retirement age, the Social Security Administration recalculates monthly payments, augmenting them to compensate for earlier withheld amounts. Despite this adjustment, during the period before full retirement age, individuals might experience lower monthly benefit payments if their earnings surpass the earnings-test limit.
Considerations for Claiming Social Security Early
For employees eligible to receive Social Security but yet to reach full retirement age, deciding when to claim benefits requires strategic thought, especially if employment will continue. If working is expected to persist, delaying benefit claims until full retirement age can prevent mandatory withholding and preserve monthly benefit levels.
While benefits withheld because of excess earnings are eventually reimbursed after reaching full retirement age, claiming benefits early carries a separate consequence—a permanent reduction in monthly Social Security payments. This diminution may pose financial challenges during later retirement years, particularly if expense needs increase or medical costs arise.
Consequently, individuals who anticipate ongoing employment might find it advantageous to manage expenses through current income, even if it requires stricter budgeting. Such an approach allows postponing benefit claims until full retirement age, maximizing the amount received in the long term.
Nonetheless, some individuals may face circumstances that compel them to claim benefits prior to full retirement age while continuing to work. In these situations, a thorough understanding of the applicable earnings limits and the degree to which excess income affects monthly payments is essential to avoid unexpected reductions.
Summary
Social Security benefits provide a vital income base for retirees but often cover less than half of pre-retirement earnings. Those collecting benefits before reaching full retirement age should carefully examine how additional earnings interact with Social Security's earnings test, particularly the 2026 limits of $24,480 and $65,160 which trigger withholding of benefits. Early claiming while working can lead to permanently lowered monthly benefits, underscoring the importance of informed planning.