Pitfalls in Taking Early Social Security
Jane M. Young CFP, EA
You can begin taking Social Security at age 62 but there are some disadvantages to starting before your normal retirement age. The decision on when to start taking Social Security is dependent on your unique set of circumstances. Generally, if you plan to keep working, if you can cover your current expenses and if you are reasonably healthy you will be better off taking Social Security on or after your normal retirement age. Your normal retirement age can be found on your annual statement or by going to www.socialsecurity.gov and searching for normal retirement age.
Taking Social Security early will result in a reduced benefit. Your benefits will be reduced based on the number of months you receive Social Security before your normal retirement age. For example if your normal retirement age is 66, the approximate reduction in benefits at age 62 is 25%, at 63 is 20%, at 64 is 13.3% and at 65 is 6.7%. If you were born after 1960 and you start taking benefits at age 62 your maximum reduction in benefits will be around 30%.
On the other hand, if you decide to take Social Security after your normal retirement age, you may receive a larger benefit. Do not wait to take your Social Security beyond age 70 because there is no additional increase in the benefit after 70. Taking Social Security after your normal retirement age is generally most beneficial for those who expect to live beyond their average life expectancy. If you plan to keep working, taking Social Security early may be especially tricky. If you take benefits before your normal retirement age and earn over a certain level, the Social Security Administration withholds part of your benefit. In 2012 Social Security will withhold $1 in benefits for every $2 of earnings above $14,640 and $1 in benefits for every $3 of earnings above $38,880. However, all is not lost, after you reach full retirement age your benefit is recalculated to give you credit for the benefits that were withheld as a result of earning above the exempt amount.
Another potential downfall to taking Social Security early, especially if you are working or have other forms of income, is paying federal income tax on your benefit. If you wait to take Social Security at your normal retirement age, your income may be lower and a smaller portion of your benefit may be taxable. If you file a joint return and you have combined income (adjusted gross income, plus ½ of Social Security and tax exempt interest) of between $32,000 and $44,000 you may have to pay income tax on up to 50% of your benefit. If your combined income is over $44,000 you may have to pay taxes on up to 85% of your benefit.
The decision on when to take Social Security can be very complicated and these are just a few of the many factors that should be taken into consideration.