Maximizing Social Security Benefits: What You Need to Know

Many Americans are asking questions about Social Security, which is crucial for nearly 52 million retirees. As of the end of January, these benefits form a key part of their income.

If you’re eligible for Social Security, claiming benefits doesn’t mean you should stop working. If you’ve reached your full retirement age (FRA)—the age when you can receive your primary insurance amount (PIA)—you are free to claim benefits while enjoying your career without restrictions.

Stay Informed Every Morning! Subscribe to Breakfast News for daily updates sent straight to your inbox. Sign Up For Free »

However, if you decide to claim benefits before reaching your FRA and continue to earn above a certain amount, you will need to be aware of the Social Security retirement earnings test (RET). Here are key points that can help you navigate this and optimize your earnings.

Image Source: Getty Images.

Upcoming Earnings Limits in 2025

If you won’t reach your FRA in 2025, the earnings limit is set at $23,400. If you earn above this amount, your annual benefits will decrease by $1 for every $2 earned over the limit. For instance, should you earn $28,400, your benefits would drop by $2,500 ($5,000 divided by two).

For those reaching FRA in 2025, the cap is significantly higher at $62,160. Earnings above this will reduce benefits by $1 for every $3 over the limit. For example, earning $68,160 would mean a reduction of $2,000 ($6,000 divided by three). Importantly, any earnings in or after the month you reach FRA don’t count against the RET.

The national average wage index (NAWI) is the benchmark for determining the annual increases in these limits. In rare cases, like from 2009-2011 and 2015-2016, the NAWI did not increase, which meant the limits stayed the same. Keeping abreast of these limits is crucial as you may find yourself over the threshold in one year but not in another.

Understanding How the Retirement Earnings Test Works

While having benefits reduced isn’t ideal—especially since claiming early already lowers them—it’s reassuring to know that the reduction is not permanent. Essentially, your affected benefits are withheld temporarily.

Upon reaching your FRA, Social Security will recalculate your benefits, gradually restoring the withheld amount. For example, if you claimed benefits at 65 and exceeded the RET limit, causing a $2,000 annual reduction, Social Security would have withheld $4,000 over two years. Once you reach 67, the program adjusts your monthly benefits to account for those withheld amounts, leading to higher payments thereafter.

Is Earning Above the Limit Worth the Reduction?

Though a decrease in Social Security benefits may not be welcomed, some situations make it worthwhile, especially if the reduced benefits don’t strain your finances. Beyond financial factors, continuing to work can offer personal benefits, keeping you active, socially engaged, and motivated.

Ultimately, working in retirement should ideally come from a desire to stay active rather than a need to cover basic expenses. As such, understanding the mechanics of the Social Security RET is essential for making informed decisions about claiming benefits early while still earning a paycheck.

Unlocking a Hidden $22,924 Social Security Bonus

If you’re like many Americans, you might be behind on your retirement savings. Fortunately, there are some lesser-known “Social Security secrets” that can help boost your retirement income. For example, one simple trick could lead to an additional $22,924 each year! By learning to maximize your Social Security benefits, achieving financial peace in retirement may be closer than you think. Click here to explore these strategies further.

Discover the “Social Security secrets” »

The Motley Fool has a disclosure policy.

The views expressed in this article are those of the author and do not necessarily reflect those of Nasdaq, Inc.