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Social Security: 1 Simple Chart Shows How Working Before 66 Can Affect Your Benefits

Speaking generally, there is nothing wrong with taking Social Security benefits at the earliest possible time, as the large majority of Americans choose to do.

But there is at least one major exception: You should think twice about doing so if you plan to continue working. Before turning 66, your annual benefits will be reduced by $1 for every $2 you earn above $15,480.

This chart says it all
You can see the impact that continuing to work after 62 (but before 66) has on the typical retiree's benefits in the following chart.

This shows that the average retiree's benefits aren't affected until his or her annual earned income exceeds $15,480. And for every $2 earned above that amount, the annual benefits are reduced by $1.

Now, just to be clear, this assumes that a reduction in benefits will hit a retiree's monthly checks equally. But in reality, your annual benefit is reduced in one fell swoop.

Here's an example from the Social Security Administration that explains how this works (emphasis added):

Let's say you file for Social Security benefits at age 62 in January 2014 and your payment will be $600 per month ($7,200 for the year). During 2014, you plan to work and earn $20,800 ($5,320 above the $15,480 limit). We would withhold $2,660 of your Social Security benefits ($1 for every $2 you earn over the limit). To do this, we would withhold all benefit payments from January 2014 through May 2014. Beginning in June 2014, you would receive your $600 benefit, and this amount would be paid to you each month for the remainder of the year. In 2015, we would pay you the additional $340 we withheld in May 2014.

The good news: Your withheld benefits aren't lost forever
While this sounds ominous, the good news is that you'll eventually recoup any money that's withheld via larger benefits after reaching full retirement at age 66. At that point, your monthly benefit will increase to take into account the months in which benefits were withheld.

Here's a second example from the Social Security Administration that illustrates this point:

Let's say you claim retirement benefits upon turning 62 in 2014 and your payment is $750 per month. Then, you return to work and have 12 months of benefits withheld. We would recalculate your benefit at your full retirement age of 66 and pay you $800 a month (in today's dollars). Or, maybe you earn so much between the ages of 62 and 66 that all benefits in those years are withheld. In that case, we would pay you $1,000 a month starting at age 66.

The point is that your payments won't be lost forever. They're just delayed until full retirement, at which time you're entitled to benefits with no limit on your earnings.

Either way, however, it isn't hard to see why claiming benefits early would be somewhat pointless (unless you're doing so to trigger spousal benefits akin to the claim-and-suspend strategy) if you earn far more than the $15,480 threshold.

How to get even more income during retirement
Social Security plays a key role in your financial security, but it's not the only way to boost your retirement income. In our brand-new free report, our retirement experts give their insight on a simple strategy to take advantage of a little-known IRS rule that can help ensure a more comfortable retirement for you and your family. Click here to get your copy today.


Read/Post Comments (5) | Recommend This Article (53)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 21, 2014, at 10:57 AM, Morovis wrote:

    If the withheld benefits are eventually returned to you, why are they kept in the first place? Perhaps with the expectation that some people will pass away before their Full Retirement Age and thus not collect the withheld amount?

  • Report this Comment On June 21, 2014, at 11:30 AM, greyhound44 wrote:

    Only a fool works in the USA after age 62!

  • Report this Comment On June 21, 2014, at 2:28 PM, RalphS wrote:

    Obviously the rules have changed some since my wife's dad passed away in 86. He started taking SS payments at age 65 and had his payments reduced as the article talks about as he continued working until he quit working at 76. They resumed the full payments at 70. I will say that the payments after 70 were a little higher than if he had quit work at 65.

  • Report this Comment On June 22, 2014, at 7:48 PM, JohanStrauss wrote:

    62 and two months...the two additional months only because I want to finish out 2018.

  • Report this Comment On June 29, 2014, at 7:50 AM, gazman01 wrote:

    Are you strictly talking about earned income? What would happen if you used a combination of your pretax retirement fund and social security at age 62? Would that also reduce your social security benefits $2 for 1$?

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John Maxfield
JohnMaxfield37

John has been writing for The Motley Fool since 2011. As a senior banking analyst, he covers the financial industry and the nation's largest banks in particular. He has a bachelor's degree in economics from Lewis and Clark College and a juris doctorate from Southern Methodist University. He's a licensed attorney in the state of Oregon, and resides in Portland with his wife and twin sons. View John Maxfield's profile on LinkedIn

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