Collecting Social Security upon your retirement comes with several rules and restrictions you should be aware of if you want to make the most of your benefit, and those change depending on the age at which you retire.
One of the most important things to know is the earnings limit, or the maximum amount you can earn to receive your full Social Security benefit if you withdraw before your full retirement age. After you pass the income limit, benefits are reduced according to the amount you make.
But things are a bit different in the first year of retirement, hence the policy known as the Social Security first year of retirement rule. Essentially, this rule is meant to modify the earnings limit to account for those who retire mid-year, but who have already surpassed the annual earnings limit.
It is important to understand these policies in order to avoid a benefit overpayment notice or worse – having your benefits terminated unexpectedly.
Understanding the Earnings Limit
You can technically start receiving Social Security benefits at the age of 62, but until you reach the full retirement age (which varies based on the year you were born), your benefits are subject to important restrictions.
This includes the earnings limit, or the maximum amount you can earn each year before your total Social Security benefit is reduced. It changes year to year, but in 2023, that limit is $21,240. For every $2 you exceed that limit, $1 is withheld from your benefits.
There is one exception to this rule: the year in which you will reach full retirement age. For the period between January 1 and the month you attain full retirement age, the income limit increases to $56,520 (for 2023) without a reduction in benefits. For every $3 you exceed that limit, $1 will be withheld in benefits.
This means that if you have a birthday in August, you’ll have a seven month period with an increased income limit before it’s dropped completely at your full retirement age. As a result of these increased limits and decreased withholding amounts, many individuals can retire at the beginning of the calendar year they attain their full retirement age rather than waiting until their actual birthdays.
Once you reach full retirement age, there is no limit on your earnings.
With this policy, one big outstanding question comes with what happens to those who retire in the middle of the year. If you retire halfway through the year, but you have already reached the annual earnings limit – what happens then? Are you still eligible to receive any benefits? This is where the Social Security first year of retirement rule comes in.
How the First Year of Retirement Rule Works
For those who retire before their full retirement age, but retire in the middle of the year, the earnings limit works a bit differently. This is commonly called the first year of retirement rule.
Essentially, the earnings limit rules switch in this case from an annual limit to a monthly limit. This means that no matter how much money you earn in the first year of collecting Social Security, you can receive your Social Security benefit for any month where you earn less than the monthly limit.
This protects those who retire in the middle of the year in their first year of retirement, ensuring they can still receive benefits even if they met the annual earnings limit before retiring.
For example, say you earned $50,000 from January until July, and then retired in the summer. If you then filed for benefits, the monthly income limit would make you eligible to receive those benefits even though you are clearly in excess of the annual limit.
The monthly limit is always the annual limit divided by 12. So with the 2023 annual limit of $21,240, the monthly limit is $1,770.
The one exception is during the calendar year you attain full retirement age. During that period, the earnings limit that will apply to you nearly triples to $56,520 annually (again that’s for 2023) which would give you a monthly limit of $4,710.
This first year of retirement rule runs for the remainder of the calendar year, and then the annual limit begins to apply again all the way up to your full retirement age.
Exceptions to the Social Security First Year of Retirement Rule
The first year of retirement rule can be a big help to high earners who still want to collect Social Security benefits after retiring mid-year, but it has some important exceptions to be aware of.
Perhaps most importantly, individuals who are self employed are affected differently by this rule. The Social Security Administration recognizes that self employed individuals have some control over the way their compensation is received. So for these individuals, the rule says that if you are under the earnings limit, Social Security will consider your time spent in the business.
In addition to being under the earnings limit, you can’t spend more than 45 hours per month working in the business. There is an additional rule that says if you are working in a “highly skilled occupation,” the time spent in the business could be as low as 15 hours per month. But in no case can less than 15 hours per month be counted as exceeding the limit.
In order to make sure you’ll receive your benefit as a self employed worker, you’ll want to ensure you meet this requirement.
It’s also important to understand what exactly counts as income for the purposes of determining whether you exceed the monthly earnings limit.
There are a number of types of income that won’t count toward the income limit, including:
- Pension payments
- Most annuity payments
- Money from IRAs, 401k plans, and other retirement account distributions
- Interest income
- Capital gains
- Other unearned income such as rental income, etc.
Income that counts when calculating the earnings limit includes:
- Gross wages from employment income
- Net earnings from self-employment (also keep in mind the time spent in the business rules for the first year)
For a more comprehensive view on types of income, check out my article The Social Security Income Limit, What Counts as Income?
Planning for Your Social Security Benefit
With a more complete understanding of the Social Security first year of retirement rule, as well as the broader earnings limit, your planning can begin to take shape.
If you want to supercharge your planning, set aside an hour to attend my free online workshop, How To Choose The Right Time To File For Social Security.
In this workshop, I cover
- The nine factors you should consider before you file for Social Security,
- How to coordinate your Social Security filing decision with your other income and assets for a tax-efficient distribution strategy, and
- How to avoid making the big mistakes that give no second chances.
To get registered, just visit this page.