SLEDGE: When can you legally earn more benefits?

Q: I heard you can begin taking Social Security earlier in the calendar year in which you reach your full retirement age (for example, turn age 66 in July 2010, but start drawing Social Security in January 2010), and that you can earn more than the $14,160 normally allowed without penalty – but for that year only. How does this work? — Greg
A: In my experience, Greg, it’s been rare that unofficial, second-hand information about Social Security is correct. This is one of those rare times, however. What you heard is right.
The law imposes restrictions on your earnings before you reach your full retirement age. Those restrictions come in two stages: from age 62 up to the year you reach full retirement age; and then from the start of that year up to the month you reach full retirement age.
Let’s use your example and say you were born on July 15, 1944. Since you were born between 1943 and 1954, your full retirement age is 66, and you’ll reach 66 in this case on July 15, 2010. From age 62 through December 31, 2009, the current earnings limit is $14,160 for the year, and if you exceed that limit they’ll hold back $1 in benefits for every $2 you go over the limit. Then from January 1, 2010, through June 30, 2010, you’re allowed to make a good deal more. Currently, this amount is $37,680, and if you earn over that they’ll hold back $1 in benefits for every $3 you exceed the limit. Finally, from July 1, 2010, on, the sky’s the limit. No more limits on your earned income. And remember that throughout this discussion, all we’ve been talking about has been earned income - gross wages from employment and net earnings from self-employment. Everything else, such as pensions or investment income, is disregarded and doesn’t affect the payment of your Social Security benefit.
But what if you had decided to retire, say, in October 2009 - in other words, in the year before you reached your full retirement age? You’d still be in that period when the limit on earnings for the year is $14,160. Chances are good that if you work full-time up until you retire, your earnings for the period January through September will be well over $14,160. Let’s say you make $45,000 during those nine months. Since this is way over $14,160, can we pay you benefits for the last three months, when you’re not working? We can. For one year, we’ll use a monthly test in place of the annual test. Just divide $14,160 by 12, and you get $1,180. No matter how much you make through September, we’ll pay you your benefits for October on as long as you don’t make more than $1,180 a month.
For more on this topic, check out http://www.socialsecurity.gov, especially the publication titled “How Work Affects Your Benefits.” You’ll find it under “Forms and Publications.”