How much can you Earn while Retired and Collecting Social Security

The amount of Social Security payments that you can collect will be limited by your lifetime income.  The amount that you have earned each year is averaged over your working life, and your Social Security benefit is based upon an average of the highest 35 years of earnings.  The more income you make, the higher your benefit will be.  Another factor that is used to determine your benefit is the age at which you retire.  Your full retirement age is determined by your year of birth.  You can retire at age 62, and receive a reduced benefit.  If you retire after your full retirement age, you will receive a larger benefit. 

If you wait until your full retirement age to retire, then you will receive the full amount of your benefit based on the average of your lifetime earnings, whether you continue to work or not, no matter how much you make.  If you choose to continue working and not to receive benefits after your full retirement age, then you will receive “credits” up to age 70, giving you an increased benefit when you finally decide to apply for benefits.

If you are considering retiring early, it is important to know the difference between your retirement age and your “stop work” age.  Any year that you don’t have earned income before your retirement age is averaged into your lifetime earnings as a zero-earnings year, which can reduce your benefit amount.  Your retirement age is the age that you actually apply for benefits.  The stop work age is the age that you stop earning wages or self-employment income (and therefore stop paying FICA taxes).

If you choose to apply for benefits at the age of 62, but continue to work as you receive benefits, then your benefits will be reduced by $1 for each $2 that you earn over the wage-earning limit for that year.   This $1 for each $2 ratio is not always the same; as you approach your full retirement age it can vary.  For 2011, the wage-earning limit is $14,160.  The limit can change each year.  Your Social Security benefit will be re-calculated and increased if the “reduced benefit year” is one of your highest wage-earning years, so that you can recoup your benefit that was withheld.

The Social Security Administration reviews the account of every person who works and receives benefits each year.  If, as a result of this review, you are eligible for a higher benefit amount, it will automatically be recalculated, and your benefit will increase thereafter.

To review your possible benefits based on a number of scenarios, visit the Social Security Estimator at the official site of the Social Security Administration.   

Caution:  many people confuse the tax-ability of Social Security with the reduction of benefits because of an early retirement.  They are separate issues, involving very different income limits and rules.