Does working in retirement impact the size of your Social Security benefits?

A recent survey by the Massachusetts Mutual Life Insurance Co. found that 55% of respondents reported incorrectly that it didn't:

More than half of those surveyed (55 percent) incorrectly believe that they can continue working while collecting full Social Security retirement benefits regardless of their age.

In short, working in retirement does impact the size of your monthly benefits. But this doesn't mean you should necessarily avoid work after applying for Social Security. While doing so might decrease the size of your benefits in the short run, it could have the opposite effect over time.

The rules that govern the impact on Social Security benefits of working in retirement pivot around your full retirement age -- that is, the age at which you're eligible to receive your full slate of benefits based on your 35 highest-earning working years.

If you elect to receive benefits before reaching your full retirement age but continue working, your benefits will be reduced by $1 for every $2 you earn above $15,720 or $1 for every $3 you earn above $41,800.

Let's say, for instance, that Rob applies for Social Security benefits at age 62. Based on his history of earnings, and because he is taking benefits before reaching his full retirement age, Rob is entitled to $1,500 a month. Because this does not cover his bills, Rob also gets a part-time job that pays $25,000 a year. In this case, his annual benefits will be reduced by $4,640 in lieu of his earnings, which is equivalent to missing out on three monthly Social Security checks over the course of the year.

While this might seem unfair, there are two points to keep in mind. In the first case, working will only reduce your benefits if you haven't yet reached full retirement age. "If you work, and are full retirement age or older, you may keep all of your benefits no matter how much you earn," explains the SSA's pamphlet, How Work Affects Your Benefits.

In the second case, any benefits withheld as a consequence of working prior to full retirement are effectively recaptured once you reach that threshold. Here's the example the SSA uses to illustrate this point:

[L]et's say you claim retirement benefits upon turning 62 in 2015, 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 per 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.

Thus, while it's wrong to say working in retirement has no impact on your Social Security benefits, particularly prior to reaching full retirement age, it's similarly wrong to conclude that the impact is entirely negative. Yes, your benefits could be reduced in the short run. But they won't be lost forever.