Personal Finance

Social Security's First Year Retirement Rule Explained

Kristin Hitchcock

Published: December 5, 2024 9:04 am

Managing Social Security benefits can be complicated, especially if you decide to retire in the middle of the year. And, let’s be honest, most retirees will not retire right on January 1st!

If this describes you, it’s important to be aware of the First Year Retirement Rule, which can significantly impact retirees who leave the workforce mid-year.

This special rule is designed to ensure retirees don’t miss out on benefits simply because they earned more than the annual earnings limit earlier in the year.

24/7 Wall St. Key Points

• If you transition out of the workforce mid-year, it’s important to understand the First Year Retirement Rule.
• This Rule allows you to track your income monthly instead of annually, which prevents you from becoming disqualified from previous months’ earnings when you retire in the middle of the year.
• Also: Take this quiz to see if you’re on track to retire (Sponsored)

What is the First-Year Retirement Rule?

For retirees younger than their full retirement age, Social Security has an annual earnings limit. If you exceed this limit, your benefits may be reduced significantly. However, the First Year Retirement Rule was created to prevent retirees from missing out on benefits due to this limit.

Instead of looking at your total annual earnings, Social Security evaluates your income on a monthly basis during this period.

This means you’ll receive your full Social Security benefits for an entire month when you’re retired as long as your monthly earnings are below the monthly limit. This provision applies to salaried employees and those who are self-employed, provided they aren’t performing “substantial services.”

How Monthly Income Limits Are Calculated

The monthly earnings limit in the first year of retirement is a fraction of the annual earnings cap. For example:

• If the annual earnings limit is $21,240, the monthly limit would be $1,700.

Retirees can earn up to this monthly limit in any given month and still qualify for limits, no matter how much they earned earlier in the year.

Situations Where This Might Help

The First Year Retirement Rule is particularly useful in two situations:

• Mid-Year Retirement: If you retire mid-year after earning more than the annual earnings limit but now plan to earn below the monthly limit, you can still receive full benefits for the months you are fully retired.
• Transitioning to Self-Employment: Those who are transitioning into retirement from self-employment will need to ensure that they aren’t performing “substantial services.” Typically, this is working more than 15 hours a week. If this condition is met, you can receive your full benefits for that month.

Using This Rule When Planning

So, how do you use this rule when planning for retirement? Here’s what you need to do:

• Track Your Income: Track your monthly earnings to ensure you stay within the allowable limit after retirement.
• Plan Your Retirement Date: Choosing a mid-year retirement could enable you to maximize both your working income and Social Security benefits.
• Evaluate Self-Employment Workload: Reduce your workload to avoid disqualifying yourself from benefits due to “substantial services.”