Why Claiming Social Security Benefits Early Is Not a Good Retirement Strategy

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Taking Social Security benefits should never be started without taking time to think about it and the consequences. Although claiming Social Security payments early may seem like a quick solution to immediate financial needs, there are some things you should know before taking that step.

Social Security can be claimed once you reach 62. If you can wait longer, it will be to your benefit. The one advantage you will have if you claim benefits at 62 is that you will receive payments longer than if you applied at 67. You will get benefits longer, but you get much less money than is possible each month.

Social Security Payments Increase Every Year You Wait

Every year you wait before starting to get payments, you will get an additional 8 percent. Once you reach 70, you will be eligible for your maximum Social Security benefits.

Once you reach your full retirement age, you can get 100 percent of the benefits you are entitled to. Payments are based on your income through the years, which your employer—or you reported—if you are self-employed. People born in 1960 or later must wait until they are 67 before they can get full benefits.

The NerdWallet’s calculator webpage shows that someone who has earned $40,000 annually would get $1,197 per month ($14,364 annually) if they take Social Security at 62. If they wait until they are 67, they will receive $1,721 monthly ($20,652 annually). It is a difference of $524 per month. If they wait until 70, they will get $2,143 per month ($25,716 annually)—$946 more per month than if they started getting benefits at 62.

If Social Security will be your only income during retirement, it makes a lot of sense to wait as long as possible before starting to get Social Security benefits.

The Spouse’s Benefit Is Also Reduced If You Claim Early

If you and your spouse are the same age and start Social Security at 62, the Social Security Administration says the spouse can get up to one-half of the income-provider’s income. Claiming benefits early means that both spouses get much less than is possible.

Getting benefits early can create a serious problem when one of the spouses dies. Although the combined income may meet many of the bills, when the spouse’s income is lost, it would be nearly impossible without an additional income.

If the surviving spouse received half of the other spouse’s Social Security income, they could claim the other spouse’s benefits—but they will also lose their own. It means a drastic loss of income. Taxes for singles are also higher than for married couples. On the other hand, if they earned more during their working years, they could claim their benefits when they reach full retirement age.

Working While Getting Social Security Benefits

You can claim Social Security early and still work. You will have to take low payments. Besides that, Social Security will reduce your benefits further if you earn more than a certain amount. Not only that, but your income also determines how much you pay for Medicare when you reach 65.

Working a job or being self-employed after claiming SS benefits and depending on that income until years later is not a good idea. Finance.Yahoo reports that as many as 40 percent of people over 50 who visit financial advisors indicated that they had entered forced retirement. Whether being laid off because of downsizing, mergers, or health reasons (as many are), you need to think twice about working after getting Social Security—you may be unable to. Many of them were also unable to get a new job afterward.

The Earnings Limit for Those Taking Social Security Early

The earnings limit for people working while getting Social Security benefits is determined by the Social Security Administration. For 2024, the limit is $22,320.

When you earn more than that amount, until you reach your full retirement age, your Social Security benefits are reduced by $1 for every $2 you earn above the limit. Once you enter the year that you will reach full retirement age, your benefits are reduced by $1 for every $3 you earn above the higher limit for that year, which is $59,520. Once the month starts when you reach your full retirement age, there is no longer a limit on how much you will earn.

There are two different tiers of reduced benefits if you earn more than the limits. If you are single and earn $25,000–34,000, or married filing jointly and earn $32,000–44,000, you are taxed on 50 percent of your benefits. If you are single and earn more than $34,000 or married filing jointly and earn more than $44,000, you will get taxed on 85 percent of your benefits.

Avoid States That Tax Social Security

Taking Social Security benefits early may also cause another problem depending on where you live. Since your benefits are already low, be aware that Investopedia says there are 11 states that charge tax on Social Security benefits. Those states are Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont, and West Virginia. If you live in Colorado, the state will tax your Social Security benefits if you are younger than 65.

Some states, USAToday reports, will exempt your Social Security income if your adjusted gross income (AGI) is over a certain amount; for example: Kansas—$75,000; New Mexico—$100,000 for singles and $150,000 for married filing jointly. Some states do not have an income tax at all.

Before you send in your Social Security application, be sure you have calculated whether you can afford to be without another income from other sources if you get a forced retirement. Retirement calculators are available online, and so are financial advisors that can help you determine the best time to start getting Social Security benefits.

The Epoch Times copyright © 2024. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.