Taking Social Security at the age of 62 is an option. While it?s tempting and very common, more than three-quarters of eligible workers file early, according to the Social Security Administration (SSA). Consider the following financial repercussions if you take benefits before full retirement age (FRA).
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Your benefits will be permanently reduced. While everyone who has earned enough work credits is eligible to take Social Security at age 62, if you do, the SSA reduces your benefits by 25 percent for life. On the opposite end, for every year you delay between your FRA and age 70, you?ll get an increase of 8 percent. Let?s say your full Social Security benefit at 66 would be $1,000. Take it at age 62, and you?ll get only $750. Hold off until age 70, and it goes up to $1,320.?
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The amount you?ll collect over time depends on the size of your monthly benefits and how long you live. Using the same example, if you live to 78, you?ll pretty much break even whether you begin collecting at 62 or 66. And the longer you live, the more the numbers favor waiting. If your full benefit at 66 would be $1,000 but you file at 62 and live to 95, you?ll collect almost $100,000 less than the 95-year-old who waited until age 70.?
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If you?re still working, some of your benefits will be withheld. If you plan to keep working for a few years, realize that when you file for Social Security benefits before your FRA and your earnings exceed certain limits, part of your benefit will be temporarily withheld. In the year prior to your FRA, $1 is deducted for every $3 you earn above a higher limit, currently $41,880. Once you reach your FRA, there?s no deduction and you?ll get the money previously withheld in the form of a higher benefit, but the withholding will have an impact on your payout during your pre-FRA years. And regardless of age, as much as 50 percent to 85 percent of your benefit may be subject to income tax if your modified adjusted gross income (MAGI) is above certain levels, currently $25,000 for single filers, or $32,000 for married filing jointly. Another consideration: your Social Security benefit could actually bump you into a higher income tax bracket.
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Survivor benefits for your spouse will be less. If you?re married, and you predecease your spouse, taking Social Security early would also reduce his or her monthly spousal survivor payout. ?
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While I?ve been focusing on the downside, if you have unmarried children or grandchildren who are your legal dependents, you could get a bit of an increase as a family no matter when you file. Children under 18 (up to 19 if a full-time student in elementary or secondary school) or a disabled child can receive a monthly payment of up to one-half of your full retirement benefit, with a family limit of between 150 percent to 180 percent of your full benefit. If it applies, it?s worth noting as you do your calculations.
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Do the math before you decide. Like most other financial decisions, deciding when to file depends on your personal circumstances. If you need the cash now to make ends meet, by all means take Social Security at the first opportunity. But if you can manage without it, it?s important to at least consider waiting. Do the math. Talk to your spouse. Consult with your financial adviser. For the record, if you do decide to take your benefits at age 62, the SSA gives you the chance to change your mind during the first year as long as you pay back any benefits that you?ve received. ?
