You can opt to collect reduced Social Security benefits as early as age 62 if you don't want to wait for full retirement age, which the Social Security Administration sets somewhere between 65 and 67, depending on your birth date. However, aside from taking as much as a 25 percent reduction in your full benefits for retiring early, your early retirement benefits might be cut by an additional $1 for every $2 you earn above a set amount which, in 2011, stood at $14,160.
The earned income penalty disappears once you reach full retirement age but, until then, it's important to understand how -- or if -- the Social Security Administration will count your income against your benefits.
What Counts As Income?
If you are employed, all wages reported on your W-2 count as earnings, or income, for purposes of calculating Social Security benefits during early retirement. On the other hand, if you are self-employed, your net income counts towards your earning limit. When you calculate income for Social Security purposes, do not consider money received from investments, pensions, capital gains, or other government benefits.
When Do You Count Income Earned?
Employed wage earners count any benefits received as income in the period during which they are earned. For example, if you earn 12 hours of paid time, such as sick time or paid time off, during 2011, but don't use it until a subsequent year, then it is still considered income earned in 2011. Conversely, self-employed individuals only count income as earned when it is actually received.
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First Year of Retirement: Employees
During your first year of retirement, different rules apply to your income limits as you determine your Social Security benefits. Under this rule, you don't have to count income that you earn before your retirement date toward your annual earnings limit. Instead, a month-by-month earnings test will apply. For example, if you retire in July after you have already exceeded the $14,160 earnings cap for the year, you might still collect full benefits for the following months as long as your monthly retirement earnings are low enough.
First Year of Retirement: Self-Employed
If you're self-employed, different rules apply for your first year of retirement. In addition to monthly income rules applicable to employees, Social Security will also make further determinations as to whether you are considered retired before you reach full retirement age. For example, if you work less than 15 hours per week, then you are generally considered retired. If you work more than 45 hours per week, you are not. If you work between 15 and 45 hours per week, then the Social Security Administration considers factors such as the size of your business, the level of skill required to run it, and your involvement in the business to determine whether you're still considered retired.
Reporting Changes in Income
Social Security benefits are adjusted every year based on your anticipated earnings for the year. However, if your actual earnings differ from the number reported to the Social Security Administration, then you should report any changes immediately as they might affect the amount of benefits you will receive.
If your Social Security benefits are reduced due to increased earnings, they will be increased when you reach full retirement age. Thus, you don't lose your Social Security benefits due to changes in earnings; they are merely deferred.
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