Claiming Social Security Early and Planning to Work? Don't Let This Lesser-Known Rule Cost You Money.

There have been many questions surrounding Social Security in recent times, but one thing remains true: It's an essential source of income for many of the almost 52 million Americans who were receiving retired workers' benefits as of the end of January.

Regardless of how much of your retirement income Social Security accounts for, claiming benefits doesn't mean you have to stop working. If you're at or past your full retirement age (FRA) -- which is when you're eligible to receive your primary insurance amount (PIA) -- you can claim benefits and work as much as your heart desires.

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However, if you claim benefits before your FRA and continue working and earning over a certain amount, you'll face the Social Security retirement earnings test (RET). Below are a few things to know that could help you maximize your earnings while reducing the chances of being penalized.

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The 2025 limits for the Social Security retirement earnings test

If you won't reach your FRA in 2025, the earnings limit is $23,400. Earning more than that will reduce your annual benefits by $1 for every $2 in excess of that limit. For example, if you were to earn $28,400, your benefit would be reduced by $2,500 ($5,000 divided by two).

The limit for those who will reach FRA in 2025 is much higher: $62,160. Earning above that amount will reduce benefits by $1 for every $3. In this instance, if you were to earn $68,160, your annual benefit would be reduced by $2,000 ($6,000 divided by three). Earnings in or after the month you reach FRA don't count toward the RET.

Social Security uses the national average wage index (NAWI) to determine how much to increase the annual limits each year. If the NAWI doesn't increase, the limit remains the same. It's not common, but it has happened recently in 2015-2016 and 2009-2011.

It is important to stay updated on the year's RET income limit because you may be over the threshold in one year but not another.

Seeing the retirement earnings test in action

Although having your benefits reduced isn't ideal (especially because claiming early already reduces them), the good news is that your benefits aren't permanently lost to the RET. They're more or less "withheld."

After reaching your FRA, Social Security recalculates your benefits in a way that gradually adds back the withheld amount.

For example, let's assume your FRA is 67, and you decide to claim benefits at 65 while making over the RET limit. If the RET lowered your annual benefits by $2,000, Social Security would have withheld $4,000 over the two years until you reach 67.

Once you turn 67, the program will recalculate your monthly benefit to adjust for the months your benefits were withheld, increasing your payments over the rest of your life.

In some cases, making money over the RET limit is worth having benefits reduced

Having your Social Security benefits reduced may not be something people embrace with open arms, but in some cases, it's worth it if you have the opportunity, and the reduced benefits don't affect your livelihood.

Aside from the potential financial benefits, there are also personal benefits to it. It could keep you active, help you remain social, or keep you feeling driven by a purpose -- or maybe all three.

Ideally, if you're working in retirement, it's because you want to and not because you have to. However, in either case, knowing how the Social Security RET works is essential to making sure you make informed decisions about whether claiming benefits early while continuing to work is worth it.

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