Social Security Myth #3: You Will Lose Benefits If You Collect While You Are Working

October 08, 2014

In my previous two blog posts, I’ve addressed the myths of Social Security insolvency and calculating Social Security using final average earnings. Next up is a myth concerning the receipt of benefits while employed. Most of us know that the earliest we can collect a Social Security retirement benefit is age 62, but that doesn’t mean most of us plan to stop working by then. For this reason, I am often asked about the implications of collecting a Social Security benefit while working.

Just to set the record straight, yes, a person may collect a Social Security retirement benefit AND continue to work. There is nothing that prevents someone from doing that once eligible. However, the Social Security administration sets an annual earned-income threshold each year to determine how much of the benefit, if any, actually gets disbursed. The amount that gets disbursed depends on two factors: your age relative to full retirement age and the amount of earned income.

For years in which you are UNDER full retirement age

If you are under your full retirement age for the entire year, for every $2 you earn above the threshold—the earned-income threshold for 2014 is $15,480 (indexed annually)—Social Security will withhold $1 in benefit payments. Here’s what that might look like:

Let’s say you file for Social Security benefits at age 63 in January and your monthly benefit is $1,500. Then let’s say that you also plan to work and earn $45,480 for the year ($30,000 over the limit). Social Security will hold back benefit payments for the first 10 months of the year and will only pay a benefit on the last two months of the year.

For the year you ATTAIN full retirement age

Just to keep things spicy, Social Security has a different threshold and a different withholding formula for the year in which you attain full retirement age. In 2014, the earned-income threshold is $41,400 (indexed annually), and for every $3 you earn above the threshold, Social Security will withhold $1 in benefit payments. Here’s what that might look like:

Let’s say you turn age 66 in October and earned $45,000 from January through September ($3,600 over the threshold). If your monthly benefit is $1,500, Social Security will only hold back the first benefit payment of the year. The $300 of excess withholding will be paid out in January of the following year.

For years AFTER full retirement age

Once you reach your full retirement age, you can earn as much income as you wish without having any benefits held back. This is one reason many people wait until full retirement age before collecting a benefit, even if they continue to work.

So what happens to those benefits that have been held back?

One misconception out there is that if you have benefits withheld because of too much earned income, you lose those benefits forever. That’s technically not true. Benefits that are held back because of your earned income exceeding the threshold are used to recalculate your monthly benefit upon attaining your full retirement age. In essence, your monthly benefit will INCREASE at full retirement age to account for these withheld benefits.

To learn more about collecting benefits while working, visit the Social Security website or check out this pamphlet from the Social Security Administration.