Most people know that early retirees will lose some of their already-reduced Social Security benefits if they keep working and earn too much.
What they may not know is that those lost benefits can be recouped later, although it may take years.
This matters to millions. Of the 27.8 million Social Security beneficiaries who are retired workers, 72 percent are under age 65, according to the Social Security Administration's Annual Statistical Supplement issued last year.
If you're under full retirement age when you begin receiving Social Security retirement benefits, you'll generally have to forfeit $1 in benefits for every $2 you earn over the dollar limit. The dollar limit this year is $10,680. (This amount typically changes each year.)
Here's a general example: If you're 62, 63 or 64, and earn $12,680 this year, you'll have to give up $1,000 in benefits. That's because you'll have earned $2,000 more than the limit on earnings of $10,680, and you must forfeit $1 in benefits for every $2 you earn above the limit.
But it's possible to get that $2,000 back. "Benefits are subsequently increased to compensate" for what you forfeit because of the earnings test, according to a study issued in May for the annual conference of the Retirement Research Consortium in Washington.
This is an important point to keep in mind, said Stephen C. Goss, chief actuary for the Social Security Administration. "So many people misunderstand the way it works," he said.
Although you may have to forfeit benefits because of the earnings test, it's only temporary. You generally will get an increase in your benefits later to help make up for what you forfeited, he said.
Suppose you start drawing Social Security retirement benefits at age 62. In general, you'll receive a 20-percent reduction in benefits because you retired 36 months early, instead of waiting until 65.
Suppose you go back to work, and earn so much money that you must forfeit all of your Social Security benefits for 24 months.
"When you reach 65, we review what happened over the 36-month period," Goss said. In this example, the Social Security Administration would see that you received benefits for only 12 of the 36 months; you forfeited all your benefits for the other 24 months.
So what would happen? Remember that, because you retired early, at 62 - 36 months before normal retirement - you generally were eligible for only 80 percent of your normal monthly benefit.
But because you forfeited your benefits for 24 months in this example, the Social Security Administration would, in effect, give you credit for that. As a result, starting at 65, you'd collect about 93.33 percent of your benefits (instead of the 80 percent for which you'd normally be eligible).
What does that mean in dollars? Suppose you'd normally be entitled to receive a monthly benefit of $1,000. But because you retired early, at age 62, you receive a reduced benefit of $800 a month.
You then forfeit 24 months of your benefits because you earned so much money. What would you get at age 65 in this example? An extra $133 a month, for a total of about $933 a month, Goss said.
That's a handsome increase. But remember that you forfeited $800 a month for 24 months, for a total of $19,200.
Now that you're receiving an extra $133 a month in benefits, how long would it take to make up for the total of $19,200 in benefits that you forfeited? About 12 years.
Keep in mind, however, that the example is basic, just to get the point across; it doesn't account for such factors as inflation, and the time value of money.
So how long might it take to get back your forfeited benefits when you take into account the time value of money? Maybe 18 or 19 years, depending on how you calculate it, Goss said.
You don't have to be a genius to figure out the impact: If you live a short time, you'll never get it back; if you live a long time, you'll get it back - and then some. The key point to remember is that if you wind up forfeiting Social Security retirement benefits because of how much you earn, those dollars aren't necessarily lost forever, said Kurt Czarnowski, regional communications director for the Social Security Administration.
"Anyone who continues to work . . . will have his or her benefits recomputed based on that work," he said. And, depending on your individual circumstances, you may wind up getting credit for that work, and receive a higher monthly benefit in later years - for the rest of your life, he said.
Should you refuse to work because of the earnings test? No, said Robert Muksian, a professor of mathematics at Bryant College in Smithfield, R.I., who researches retirement and Social Security issues.
Other factors may be more important, he said. For example, you may have to keep working - and maybe earn even more than the earnings test limit - to help pay for local property taxes, health insurance and prescription drugs.