The Pitfalls of Taking Social Security EarlySubmitted by Orange CA Financial Advisor | Sterling Wealth Partners on August 9th, 2017
One of the most important decisions a person nearing retirement needs to make is when to take Social Security. Most people are aware that you can start your benefits as early as age 62 and this often becomes a trigger point for deciding when to retire.
While you can take Social Security at age 62, there are a few pitfalls you should be aware of before making that decision. You should also keep in mind that once you start benefits the decision is for the most part irrevocable.
Reduction of Benefits:
Your Social Security benefit is calculated based on your lifetime earnings and on life expectancy calculations. Essentially, they calculate the amount of money they are going to pay you (think of it as your “pot of money”) based on your earnings and then spread that out in monthly installments based on your life expectancy. So, if you take your benefits earlier, you are spreading your pot of money out over a longer period meaning your payment is going to be smaller. If you take benefits at age 62, your benefit is reduced by 25-30% (depending on your date of birth) from what you would have received at your full retirement age (FRA) of 66-67. This reduction is permanent, and if you live past life expectancy you will have received less money than had you delayed taking benefits until a later date.
Withholding of Benefits:
If you turn on Social security prior to full retirement age and continue to work, you may see some of your benefits withheld from you. Generally, if you take benefits prior to FRA and earn more than roughly $17,000 (for 2017), you will see a $1 reduction in benefits for every $2 earned. Often, people will rush to turn on their benefit at the earliest age to get what they feel they have “paid for” during their working lives without being aware that continuing to work will cause this reduction in benefits.
Taking benefits as early as possible is enticing, but you need to be aware of the permanent reduction in benefits along with the penalty for working and taking benefits prior to FRA. Taking Social Security benefits is complex and, because the decision is generally irrevocable, requires a detailed analysis of your situation before making the decision. If you would like more information on Social Security, please contact us to schedule a complementary consultation. Or, plan on attending one of the educational seminars on the topic we are conducting this fall. Visit the events tab on our website for dates and locations.