Most people can now claim Social Security benefits at age 62, and nearly 30% chose to start receiving monthly checks as soon as possible in 2021.
While enrolling in Social Security early may make sense for some people, there are some significant drawbacks to consider. You and your surviving spouse run the risk of having your monthly payments permanently reduced, and you may not be able to keep your benefit check as large as you had hoped.
Here’s the unfortunate truth about claiming Social Security at age 62.
4 Factors That Affect Your Monthly Social Security Check
There are actually only four main inputs that determine how much Social Security will pay you in retirement.
- your work history.
- Your earnings history.
- Your full retirement age.
- Age at which you apply for benefits.
To qualify for Social Security in the first place, you must earn 40 Social Security credits. Earn 1 credit for every $1,640 you earn, up to 4 credits per year. Basically, if you’ve been in your career for at least 10 years, you’ll probably be eligible for some benefits.
However, the Social Security Administration uses your 35 highest earning years (adjusted for inflation) to calculate your benefits. Therefore, the more your job pays, the larger your Social Security check will be.
This program pays full benefits at a specified full retirement age. Your full retirement age is determined by the year you were born. The full retirement age for a person born after 1960 is 67 years old. Those born between 1955 and 1960 will reach full retirement age between age 66 and age 67, and those born before will receive full benefits at age 66.
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However, Social Security allows you to claim benefits at any age from 62 to 70. Claiming after full retirement age will generate a delayed retirement benefit of 8% per year. Therefore, if his full retirement age is 67 and he claims at age 70, his Social Security check will be increased by 24%.
If you claim before full retirement age, your monthly benefit will be reduced. If a person reaches full retirement age at age 67 and she applies at age 62, his full benefit will be reduced by 30%.
And that’s a permanent reduction for your personal benefit. This also applies if you are receiving spousal allowance. Claiming early will permanently reduce the amount the government pays you each month. Here’s the first unfortunate truth about claiming Social Security at age 62. Here are a few more.
Decrease in survivor benefits
If you are a surviving widow or widower, you may be eligible to claim up to 100% of your deceased spouse’s full retirement benefits. However, if your spouse files a claim early, the government can only collect the same amount that it paid your spouse in advance.
It’s a serious consideration for many people. If you are the older spouse and the primary breadwinner, consider how filing your claim early will affect your spouse’s survivor benefits in the event of your death in the future. need to be considered. Claiming at age 62 means you, as well as your spouse, will feel a permanent reduction in your benefits for the rest of your life.
Interestingly, however, surviving widows and widowers have the opportunity to maximize their Social Security benefits by claiming early. However, this is best supported by an older spouse who is willing to wait at least until full retirement age.
If you’re still working, your check could be reduced even more significantly
Many people are still working at age 62. And if you collect Social Security while fully employed, the government may withhold a portion of your benefit check.
The Social Security Administration conducts an income test, and if your income exceeds a certain threshold, your monthly benefits will be reduced. For 2023, that threshold is $21,240.
For every $2 of wages you earn over this limit, the Social Security Administration will deduct $1 from your benefits. This test is conducted annually until the year you reach retirement age.
Your benefits increase after you reach full retirement age, but if you plan to collect Social Security early while remaining employed, you may find that your Social Security check isn’t as helpful as you thought.
Tax bill may increase
The final downside to collecting Social Security as soon as possible is that you may miss out on the opportunity to reduce your taxes in retirement.
The federal government only taxes a portion of your Social Security benefits (from 0% to 85%). A method of determining how much profit is taxable using a metric called “total income.” Total income is the sum of adjusted gross income, tax-free interest, and half of your Social Security benefits.
If your total income exceeds a certain threshold, up to 50% of your benefits will be taxed. And if it exceeds a slightly higher threshold, you could end up paying tax on up to 85% of your benefits.
If you work while collecting Social Security, there’s a good chance that some of your Social Security benefits will be taxed. But even if you quit your job and start collecting Social Security at age 62, you could be missing out on an opportunity to lower your total lifetime tax bill.
The early years of retirement are a great time to set up retirement accounts to reduce your future taxes. This could include using a Roth IRA conversion to lower required minimum distributions later on, or harvesting capital gains at a 0% federal tax rate. If you’re already collecting Social Security, it’s harder to take advantage of these opportunities.
So the unfortunate truth is that if you claim Social Security at age 62, you could end up paying more in taxes not just this year but in the future.
