The Social Security earnings penalty refers to a temporary reduction in your Social Security benefits if you claim benefits before your full retirement age (FRA) and continue to work, earning above certain limits. This is also called the "Earnings Test."

The Earnings Penalty applies to people who claim Social Security before their full retirement age (FRA) (which is between 66 and 67, depending on your birth year) and continue to work and earn income.

The earnings limits and benefit reductions end in the month in which you reach your full retirement age.

This rule is designed to help people who retire mid-year and begin collecting benefits before full retirement age (FRA) — especially if their earnings earlier in the year exceed the annual limit. It applies only to the first year you retire and claim Social Security before FRA. Essentially, instead of applying the annual earnings limit, the SSA uses a monthly earnings test for the rest of that year.

Under this rule, you can get a full Social Security benefit for any whole month you are retired and earnings are below the monthly limit of $1,950 per month. (This is 1/12 of the ~$23,400 annual limit.) So, if in the months after you retire, you earn less than $1,950/month, you can still receive full benefits for those months — even if your total annual earnings exceed the limit.

Example: Suppose Sally retires on September 30, 2025, at age 63. She earns $50,000 through September but earns $1,950 per month or less in October through December.

In this case, Sally would receive her Social Security benefits for October through December, even though she earned more than $23,400 for the year. Beginning in 2026, only the annual earnings limit would apply.

* This exemption is not currently in place in the software. If you select to claim Social Security prior to your FRA and have work income, your Social Security income may be reduced. To compensate, you may want to add a stream of Pension Income.

Once you reach your FRA, Social Security recalculates your benefit and adds back the months they withheld. This means you'll eventually recoup the lost benefits over time if you live long enough.