2. Misunderstanding the Annual Earnings Test

Many Americans choose to semi-retire, stepping down from stressful careers to take on part-time work or consulting roles while simultaneously claiming Social Security. This strategy works perfectly once you reach your full retirement age. However, attempting this prior to your full retirement age triggers a mechanism known as the Retirement Earnings Test, which can severely reduce your immediate payments.

If you are younger than your full retirement age for the entire year, the Social Security Administration will withhold $1 in benefits for every $2 you earn above a specific annual limit. In the year you reach your full retirement age, the math shifts slightly: they withhold $1 for every $3 you earn above a significantly higher threshold, counting only the earnings achieved in the months before your birthday. Once you hit your FRA month, the earnings test disappears completely, and you can earn millions without losing a dime of your benefits.

The crucial nuance that many people miss is that the withheld money is not a penalty, nor is it lost forever. When you reach your full retirement age, the SSA recalculates your monthly benefit upward to account for the months they withheld payments. Unfortunately, the immediate cash flow shock catches many working retirees off guard. They expect to double-dip by drawing a salary and a full Social Security check, only to receive a letter stating their benefits are paused until the withheld amount is satisfied.