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."

For instance, if you stop working entirely before claiming Social Security, you may avoid the earnings penalty altogether, provided your earnings for the year remain under the set thresholds.

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.

However, if you completely stop working and your earnings remain below the threshold, the penalty does not apply.

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

If you cease working entirely before claiming, these thresholds become less relevant, as no penalties apply without earned income.

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 in the first year you retire and claim Social Security before FRA. Instead of applying the annual earnings limit, the Social Security Administration (SSA) uses a monthly earnings test for the rest of that year.

The SSA considers your total earnings for the calendar year, even if you stop working mid-year. This means earnings before you claim count toward the annual limit, which is why the monthly test can make such a difference.

Under this rule, you can receive your full Social Security benefit for any whole month you are retired and your earnings are below the monthly limit. The monthly limit is one-twelfth of the annual earnings limit for that year. So if you earn less than the monthly limit in the months after you retire, you can still receive full benefits for those months, even if your total annual earnings exceed the annual limit. The rule applies month by month, so a month with earnings above the monthly limit affects only that month.

Example: Sally retires on September 30, 2026, at age 63. She earns well above the annual limit through September, but earns less than the monthly limit in each month from October through December.

In this case, Sally would receive her Social Security benefits for October through December, even though her earnings for the year exceed the annual limit. Beginning in 2027, only the annual earnings limit would apply.

This exemption is not currently in place in the software. If you select to claim Social Security before 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.