Silver Lining for the Social Security Earnings Test

Working longer could strengthen your retirement security. But if you go back to work after filing for Social Security, it could also reduce your benefits.

Social Security beneficiaries who continue to work before they reach full retirement age are subject to what's known as the earnings test. In 2015, if you make more than $15,720, you'll lose $1 in benefits for every $2 you earn over that limit. In the year you reach full retirement age, a more lenient test applies: You'll give up $1 for every $3 in earnings over $41,880 before your birthday. Starting in the month you reach your full retirement age, you can earn as much as you want without worrying about the earnings test. Only wages from a job or self-employment income will trigger the earnings test; investment income, pension benefits, and money withdrawn from an IRA or 401(k) aren't counted.

Fortunately, the benefits aren't lost forever. Once you reach full retirement age, your benefits will be adjusted to recover the amount that was withheld. Suppose you retire at age 62 and file for benefits. You then go back to work and end up forfeiting 12 months' worth of benefits by the time you reach full retirement age at 66. When Social Security recalculates your benefits, you'll be treated as if you claimed benefits three years early instead of four. So instead of having your benefits reduced by 25% -- which is what happens when you claim at 62 -- your benefits going forward will be reduced by 20%.

To estimate how earnings will affect your benefits before full retirement age, go to www.ssa.gov/oact/cola/RTeffect.html.