Most workers realize that a retirement based entirely on income from Social Security will not be one that allows lavish or even comfortable spending, in some cases. For that reason, the agency allows early retirees to earn a certain amount at a job in the years leading up to the full retirement age of 66. […]

Most workers realize that a retirement based entirely on income from Social Security will not be one that allows lavish or even comfortable spending, in some cases. For that reason, the agency allows early retirees to earn a certain amount at a job in the years leading up to the full retirement age of 66. While this can be a great boon to your living standard, be aware that earnings that exceed a certain amount can cause a reduction in your Social Security check. To avoid mistakes or misunderstandings, you need to know the rules.

Early Retirement Explained

The youngest age at which a worker can retire and collect Social Security benefits is 62, four years ahead of what is considered the full retirement age. In return for allowing beneficiaries to choose this option, the government has set an income level that – if you exceed it -results in a reduction in your monthly check. For the year 2018, this limit has been set at $17,040 per year, which works out to be $1,420 per month. For every two dollars you earn over this amount, your benefit amount is reduced by one dollar.

The good news is that this reduction only applies to the early retirement years. Once you take full retirement, your benefit check will not be reduced no matter how much you earn. Something else to keep in mind is that the idea of continuing to work during early retirement, even in excess of the limit, is not necessarily a bad thing. Some consider it a penalty, but it does allow you to increase your lifetime learning average, which is what your benefit will be based on when you reach full retirement age.

How Much Does Early Retirement Cost?

In addition to the earnings limit that we just discussed, retiring early results in a reduction of monthly benefit compared to what you would receive if you waited until full retirement age. While Social Security breaks it down by month, below are a few select examples so you can get an idea of what the numbers are.

• Retiring at age 62 results in a 25 percent reduction in monthly check
• Retiring at age 63 results in a 20 percent reduction in monthly check
• Retiring at age 64 results in a 13.3 percent reduction in monthly check
• Retiring at age 65 results in a 6.7 percent reduction in monthly check

The above percentages are called an early retirement penalty. Depending upon a myriad of personal considerations, you may decide that it is or isn’t a price you wish to pay.

A Special Rule for Those Who are About to Turn 66

Since the government is never in favor of keeping things simple, there is a special rule that applies to early retirees in the calendar year in which you turn 66. In this case, it’s a good thing and goes like this. No matter which month your birthday falls in, beginning in January of the year you reach full retirement age, you are allowed to earn more money than the limits already discussed as applied to early retirement. Quite a bit more, actually. This temporary limit increase is $3,780.

Once again, a penalty applies if you go over this amount to the tune of a one dollar reduction in your benefit for every three dollars you earn above the monthly amount. Once you reach full retirement, you can earn as much as you want at a job or through self-employment without fear of a monetary penalty. The bottom line is that, once you hit 66, you’re free and clear to earn as much money s you like.

What About Self-Employment?

For those who earn money at a traditional job, only wages paid that show up on a W-2 form count towards the earnings limit. But what about the self-employed? It would be too much to hope that the government would just let that slide, right? Right. If you earn money in this fashion, only net earnings go into the calculation of how much you earn in any given month.

Speaking of calculations, this one is a little more nebulous. During early retirement, the agency relies on tax payments filed to assess income. During the calendar year in which you turn 66, they switch to what is called an analysis of “substantial service,” which generally is an assessment of how many hours you worked in the business. More than 45 per month puts you into the category where you might have your monthly benefit check reduced.

Final Thoughts

Other forms of income besides W-2 and self-employment don’t count towards the earnings limit. Income that falls into this category would include things like rents, royalties, investments, interest, pensions, other government benefits, annuities, and capital gains. For those with these sorts of cash inflows, consider it free money in terms of having to worry about the effect on your monthly Social Security check. The bottom line when it comes to interacting with Social Security is to let them know if there is a change in your earnings. If you don’t and it turns out to be in their favor, rest assured it will be collected and might include even further penalties.