Has anyone told you that if you work while collecting Social Security retirement benefits, you’ll lose part of your benefits? If you’re like most people who hear this, you’d probably opt not to work. What’s the sense of earning $1,000 if you lose $1,000 of benefits?
The reality is the truth is something quite different. While it’s true your Social Security benefit could be reduced if you work, there are some important distinctions to understand. First, the idea that you will lose benefits is mostly false. Even for most people who see their benefit reduced, the money is not lost.
Rather, when the worker reaches their full retirement age (typically age 66 or later for most people now), their monthly benefit will be increased based on the benefits previously withheld. While it’s not a lump sum payment, the higher monthly benefit will eventually result in everything withheld being paid back depending on how long the worker lives (with the possibility of collecting even more since the higher amount is permanent).
Now that we’ve dispelled the myth that benefits are “lost”, let’s discuss who is affected as not everyone who works and collects Social Security sees a reduction. The most important distinction is the earned income rules only apply to people younger than their full retirement age. In other words, once you reach your full retirement age, you can earn an unlimited amount without negatively impacting your Social Security benefits!
In addition, these rules only apply to earned income (typically defined as wage or self-employment income) so pensions, interest or retirement account withdrawals are not relevant to these rules (although they impact the taxation of benefits).
If you are under full retirement age, collecting Social Security benefits and have earned income, the rules may still not be applicable as there are income thresholds for when the rules apply. For example, in 2014, anyone earning less than $15,480 will not see any of their benefits withheld. Once earned income exceeds this threshold, the amount withheld is equal to $1 for every $2 of earned income.
As with most government programs, there are additional rules to keep things interesting. Social Security is no exception as there are special rules for spousal benefits, the year you start collecting benefits as well as the year you reach full retirement age. If these situations apply to you, I highly recommend reading Social Security’s explanation of the rules in Publication 05-10069 “How Work Affects Your Benefits.”