Tim Dick, CFP®
Posted on Dec. 18, 2025
Thinking about taking your Social Security benefits early, but still plan to keep working? You are not alone. Many choose to retire gradually by reducing their hours or jumping to part-time work at a more laid-back job. The thought process makes sense, less stress in exchange for a smaller paycheck, but make up the difference through a guaranteed benefit check.
Too often, however, “pre-retirees” are caught off guard when they receive a much smaller check than anticipated because of excess earnings. They overlooked a crucial concept, the Social Security Earnings Test.
Put simply, if you start collecting Social Security before your Full Retirement Age (FRA), your benefits could be significantly reduced or even completely withheld if your income goes over certain limits.
Earnings Thresholds (2026)
The first step is defining which income counts and which doesn’t. The Earnings Test only applies to earned income (gross wages and net self-employment income). This means that investment income, pensions, 401(k) distributions, and IRA withdrawals do not count against the earnings limit.
The amount you can make while collecting Social Security also depends on your age relative to your FRA.
Important Note: The higher $65,160 limit only applies to earnings made before the month you officially reach your FRA. Once you hit that birthday month, the Earnings Test disappears completely, and you can earn any amount with no reduction.
How Withholding Works
The Social Security Administration (SSA) doesn’t typically reduce your check by a small amount spread proportionately across each month. Instead, they usually withhold entire monthly checks at the beginning of the year until the total required reduction is met.
Example: Imagine you are 63 years old with a monthly benefit of $1,500. You estimate your 2026 earned income will be $31,000.
- You will be $6,520 over the limit, so the SSA must withhold $3,260 ($1 for every $2 earned over the limit).
- The SSA will withhold your January and February checks ($3,000 total), plus $260 from your March check. Your full payments resume in April.
The Risk of Underestimating
When applying for benefits, you must provide an estimate of your annual earnings. If you underestimate your earnings, the SSA could pay you more than the earnings test would otherwise allow. Once the year ends and they receive your actual W-2s, they will identify an overpayment.
To recover that money, the SSA typically withholds 100% of your future checks until the debt is paid. This sudden loss of Social Security benefits can derail your retirement plans.
It is generally safer to overestimate your earnings if you plan to work. If that’s the case the SSA withholds “too much” upfront, and they will send you a lump-sum check for the difference later. If you underestimate, you will owe them.
The Special Rule
What if you work full-time for part of the year and then retire mid-year? In theory your high prior earnings could immediately put you over the annual limit.
To prevent this, the Special Rule (or “Grace Year”) applies only during the first calendar year you claim benefits. This allows you to receive a full benefit check for any month where your earnings are below a monthly limit regardless of what you earned earlier in the year ($2,040 before FRA or $5,430 the year you reach FRA in 2026.)
Withheld Benefits Aren’t Lost
It is important to point out that benefits withheld due to the Earnings Test are not permanently lost. The money is simply delayed.
At the start of the year following your Full Retirement Age, the SSA automatically recalculates your benefit to credit you for every month your check was withheld. This results in a permanently higher monthly payment for the rest of your life. Effectively, the system treats it as if you had waited a little longer to file.
How to Best the Earnings Test
Many pre-retirees face a difficult choice: they want to start Social Security to accommodate their lifestyle, but they also want (or need) to keep working. The Earnings Test creates a significant “speed bump” for those earning a healthy salary. If your income is going to trigger sizeable withholdings, the most effective strategy is often to delay until the Earnings Test no longer applies—this could be when you step away from work entirely or until FRA.
How then can someone plan to reduce their workload (and paycheck) without negatively affecting their quality of life? This is where your broader financial plan is vital. To successfully delay Social Security, you need to develop an income “bridge”—other sources of liquidity to cover your needs while you wait for that larger, unencumbered benefit check. Typical bridge sources could include:
- Pension Income
- Cash Accounts
- Investment Assets
- Life Insurance
- Home Equity
All of these can serve as valuable tools to ensure you’re getting the most out of Social Security without sacrificing lifestyle in retirement. Each carries unique advantages and disadvantages. You should identify what assets will form your bridge and how much you’ll need to cover your income gap. The process begins with sitting down with a qualified and trusted advisor to develop a shock-resistant financial plan.
This content is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.