For many Americans, Social Security benefits represent a crucial part of their retirement income. Whether it’s to supplement savings or serve as a primary source of income, these benefits are often considered vital for a secure future.
However, there is a little-known rule that could cause you to lose a significant portion of your Social Security benefits—potentially up to $20,000 or more. Here’s what you need to know about this rule and how to avoid making a costly mistake.
The Rule: Earn Too Much and You Could Lose Benefits
One of the most common mistakes people make when it comes to Social Security is not understanding the income limits that apply if you decide to start taking benefits before reaching full retirement age (FRA). Full retirement age is typically 66 or 67, depending on the year you were born.
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If you begin receiving Social Security benefits before you reach FRA and continue to work, the Social Security Administration (SSA) imposes an earnings limit. In 2025, for example, this limit is $21,240. This means that if you are below full retirement age and earn more than this amount, the SSA will withhold a portion of your benefits.
For every $2 you earn over the limit, $1 will be withheld from your benefits. While this might not seem like a big deal, it can add up quickly. If you earn substantially more than the limit, you could lose thousands of dollars in benefits—up to $20,000 or more—depending on your income.
How Much Could You Lose?
The exact amount of benefits you lose depends on how much you earn over the limit. Let’s break it down:
- If you earn $5,000 above the earnings limit, you could lose up to $2,500 in benefits for the year (since the SSA withholds $1 for every $2 earned over the limit).
- If you earn $10,000 above the limit, you could lose $5,000 in Social Security benefits.
- If your earnings exceed the limit by $20,000 or more, you could end up losing up to $10,000 in benefits.
This loss is temporary. The Social Security Administration will recalculate your benefits once you reach full retirement age, and the money that was withheld will typically be added back to your monthly payments. However, you won’t get back the money you lost during the years when your benefits were reduced, and that can add up to a substantial amount over time.
The Exception: The Year You Turn Full Retirement Age
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There is one important exception to this rule. Once you reach the year you turn full retirement age, the earnings limit increases significantly. In 2025, for example, the limit jumps to $56,520 for individuals who will reach FRA that year.
If you earn more than this amount, the SSA will still withhold benefits, but the penalty is less severe: for every $3 you earn above the limit, $1 will be withheld from your benefits. Once you reach your full retirement age, the earnings limit no longer applies, and you can earn any amount without affecting your Social Security benefits.
How to Avoid Losing Benefits
- Delay Taking Benefits Until Full Retirement Age
If you can afford to wait, the best way to avoid this rule is by delaying taking Social Security benefits until you reach full retirement age. By doing so, you can continue working without worrying about hitting the earnings limit, and you’ll receive the full amount of your benefits. - Be Strategic About Retirement Income
If you’re not yet at full retirement age but still need income, consider how much you can earn without exceeding the limit. Reducing your working hours or taking a less demanding job might allow you to stay below the earnings cap while still earning an income. - Consider Part-Time or Seasonal Work
If you still want to work, but don’t want to risk losing benefits, consider part-time or seasonal employment that ensures you stay under the threshold for the year. - Review Your Benefits Regularly
Keep a close eye on your earnings each year to ensure you don’t inadvertently surpass the limit. The SSA typically reviews your earnings and will notify you if they have withheld benefits. If you’re approaching the earnings cap, you can adjust your income or stop working to avoid losing benefits.
How to Reclaim Withheld Benefits
Once you reach full retirement age, the Social Security Administration will automatically adjust your benefits to account for any money withheld due to earnings. They will not only return the money that was withheld but will also increase your monthly payments to reflect the time you lost benefits.
However, this increase won’t always make up for the financial strain experienced during the years when your benefits were reduced. For example, if you lost $10,000 in benefits over a few years, you may only receive a modest increase in your monthly check once your benefits are recalculated. This is why it’s critical to understand how earnings affect your benefits in order to avoid such a loss.
Conclusion
Social Security benefits are an essential part of retirement planning, but understanding how they work—especially regarding early withdrawals and the impact of earned income—is crucial. For those who plan to start taking benefits before reaching full retirement age, it’s important to be aware of the earnings limit and the potential to lose benefits.
By making informed decisions about when to start receiving Social Security and how much income to earn, you can avoid losing thousands of dollars in benefits and ensure that you’re maximizing your retirement income. Be proactive, stay informed, and work with a financial advisor if needed to make sure that you’re making the best choice for your situation.