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  • Writer's pictureJohn A. White

Understanding the Retirement Earnings Test: What Pre-Retirees Need to Know

Retirement planning is a critical aspect of financial stability, and Social Security benefits play a significant role in ensuring a comfortable retirement. However, many pre-retirees lack a clear understanding of the retirement earnings test, a rule that can impact their Social Security payments. In this article, we will delve into the intricacies of the retirement earnings test, explore why it is poorly understood, and provide guidance on how pre-retirees can navigate this rule to maximize their benefits.

The Retirement Earnings Test: An Overlooked Rule

The retirement earnings test is a crucial aspect of Social Security benefits that applies to individuals below their full retirement age (FRA). Unfortunately, the public poorly understands this rule, leaving many pre-retirees unaware of its implications on their benefits.

The test determines whether a beneficiary's Social Security payments will be reduced if they continue to work while receiving benefits. Specifically, benefits are reduced by a specific amount for every dollar earned above a certain threshold. However, it's important to note that any benefits withheld due to the test are not lost permanently.

Unveiling the Complexities of the Retirement Earnings Test

To comprehend the retirement earnings test fully, it is essential to understand its thresholds and exemptions. The test has different limits depending on whether the beneficiary has reached their full retirement age.

Thresholds Based on Age

For individuals below their full retirement age, the retirement earnings test applies to their earned income exceeding a specific threshold. In 2023, this threshold is set at $21,240, which means that for every $2 earned above this amount, benefits are reduced by $1.

However, the test operates differently in the year the beneficiary reaches their full retirement age. In 2023, the threshold increases to $56,520, and for every $3 earned above this amount, benefits are reduced by $1, but only for the months before reaching full retirement age.

Temporary Benefit Reductions

Recognizing that the reductions caused by the retirement earnings test are temporary is crucial. Once the beneficiary reaches their full retirement age, their monthly benefits will be permanently increased to account for the withheld or reduced benefits during the test period.

The Misunderstandings: Why Pre-Retirees Struggle to Grasp the Rule

Despite the importance of the retirement earnings test, there are several reasons why pre-retirees find it challenging to comprehend and navigate. One significant factor is the lack of effective communication and education about the test's impact on Social Security benefits.

Inadequate Communication

The Social Security Administration acknowledges the need to discuss the retirement earnings test with all retirement benefit applicants who may be affected by it. However, this communication does not always occur, leaving many prospective beneficiaries unaware of the rule's existence and implications.

Labor Disincentives

The retirement earnings test has been criticized for creating labor disincentives, as individuals may opt to work less or reduce their earned income to avoid crossing the income thresholds. This unintended consequence of the test may lead to individuals making decisions not in their best financial interest.

Complexity and Confusion

The intricacies of the retirement earnings test contribute to the confusion surrounding it. Understanding one's full retirement age requires decoding based on birth year, and the income thresholds that impact benefits are subject to change. Moreover, financial advisors may inadvertently perpetuate misunderstanding by referring to the test as a tax without explaining the complete benefit reductions and their temporary nature.

Navigating the Retirement Earnings Test: Key Considerations for Pre-Retirees

While the retirement earnings test may seem complex, pre-retirees can take steps to make informed decisions and maximize their Social Security benefits. Here are some essential considerations to navigate this rule effectively:

1. Educate Yourself

Take the initiative to educate yourself about the retirement earnings test and its implications on your Social Security benefits. Familiarize yourself with your full retirement age, the income thresholds, and how benefits are affected by earned income exceeding those thresholds.

2. Plan Your Retirement Timeline Strategically

Consider the timing of when you claim your Social Security benefits. While you can claim benefits as early as age 62, doing so may result in lower monthly payments due to the retirement earnings test. Delaying the claim until retirement age can lead to higher benefits.

3. Understand Benefit Recalculation

Recognize that any benefits withheld or reduced during the retirement earnings test period will be recalculated and added back once you reach your full retirement age. This means that higher benefits will eventually offset the temporary reductions.

4. Seek Professional Guidance

Consulting with a financial advisor or retirement planning expert can provide valuable insights into navigating the retirement earnings test. They can help you understand the rule's nuances, assess your situation, and develop a personalized strategy to optimize your Social Security benefits.

5. Consider Future Work Plans

If you plan to continue working while receiving Social Security benefits, be mindful of the income thresholds outlined in the retirement earnings test. Adjust your work hours or income to stay below these thresholds and avoid unnecessary benefit reductions.

6. Stay Informed About Changes

The retirement earnings test thresholds are subject to annual adjustments based on national average wage index changes. Stay updated on these changes to align your retirement planning with the current rules and thresholds.


Understanding the retirement earnings test is crucial for pre-retirees aiming to maximize their Social Security benefits. Individuals can navigate the system by familiarizing themselves with the intricacies of the rule, seeking professional guidance, and making strategic decisions about when to claim benefits. With proper education and awareness, pre-retirees can make informed choices that lead to a secure and fulfilling retirement.

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