Claiming early means more money now, but it has a lot of downsides as well.
Most people become eligible to claim their Social Security benefits at age 62, and nearly 30% of people opted to start receiving their monthly checks as soon as possible in 2021.
While getting your hands on Social Security early might make sense for some, there are some serious downsides to consider. You risk permanently lowering your monthly payment for yourself and a surviving spouse, and you might not even be able to keep as much of your benefit check as you were expecting.
Here’s the unfortunate truth about claiming Social Security at age 62.
The four factors impacting your monthly Social Security check
There are really only four main inputs that determine how much you’ll get paid by Social Security in retirement.
Your work history.
Your earnings history.
Your full retirement age.
The age you claim your benefits.
In order to qualify for Social Security in the first place, you must earn 40 Social Security credits. You earn one credit for every $1,640 in earnings, up to four credits per year. Basically, if your career lasts at least 10 years, you’ll likely qualify for some level of benefit.
However, the Social Security Administration uses your 35 highest earning years (adjusted for inflation) to calculate your benefit. So, the more your job pays you, the higher your Social Security check will be.
The program will pay out your full benefit at your designated full retirement age. Your full retirement age is determined by what year you were born. Those born in 1960 or later have a full retirement age of 67. Those born between 1955 and 1960 will reach full retirement age between 66 and 67, and those born earlier can collect their full benefit at age 66.
But Social Security allows you to claim your benefit at any age between 62 and 70. Claiming at an age later than full retirement age will produce a delayed retirement credit of 8% per year. So, if your full retirement age is 67 and you claim at 70, you’ll receive a 24% bump to your Social Security check.
If you claim earlier than your full retirement age, you’ll see a reduction in your monthly benefit. Someone with a full retirement age of 67 claiming at 62 will receive a 30% reduction in their full benefit.
And that’s a permanent reduction for your personal benefit. It also applies if you’re collecting a spousal benefit. Claiming early will permanently reduce the amount the government will pay you each month. That’s the first unfortunate truth of claiming Social Security at age 62. Here are a few more.
Lower survivor benefits
If you’re a surviving widow or widower, you’re eligible to claim up to 100% of your deceased spouse’s full retirement benefit. But if the spouse claimed early, then you’re only able to collect the same amount the government was paying them beforehand.
That’s a serious consideration for many. If you’re an older spouse and the main breadwinner of the household, you should consider how claiming early will impact your spouse’s survivor benefit down the road in the case of your passing away. Claiming at 62 means your spouse will also feel the permanent reduction in their benefits for the rest of their life, not just yours.
Interestingly, though, surviving widows and widowers have an opportunity to maximize their Social Security benefits by claiming early. But this is best supported by an older spouse who waits at least until full retirement age.
You could see an even bigger reduction in your checks if you’re still working
Many people are still working at 62. And if you’re collecting Social Security while you’re fully employed, you might see the government hold back some of your benefit check.
The Social Security Administration conducts an earnings test, which reduces your monthly benefit if your earnings exceed a certain threshold. For 2023, that threshold is $21,240.
For every $2 in wages you earn above that limit, the Social Security Administration will deduct $1 from your benefit payment. It conducts this test every year until the year you reach full retirement age.
While you’ll see an increase in your benefits after full retirement age, you might find your Social Security check isn’t helping out as much as you thought if you plan on maintaining employment while collecting Social Security early.
Your tax bill could go up
A final downside to collecting Social Security as soon as possible is that you could miss out on an opportunity to mitigate your taxes in retirement.
The federal government will only tax a portion of your Social Security benefits, ranging anywhere from 0% to 85%. The way it determines how much of your benefits to tax is by using a metric called “combined income.” Combined income is the sum of your adjusted gross income, any non-taxable interest, and half your Social Security benefits.
If your combined income exceeds a certain threshold, you’ll owe taxes on up to 50% of your benefits. And if it exceeds a slightly higher threshold, you’ll owe taxes on up to 85% of your benefits.
If you’re working while collecting Social Security, there’s a good chance you’ll get taxed on a portion of your Social Security benefits. But even if you quit working at 62 and start collecting Social Security, you could miss out on an opportunity to lower your total lifetime tax liability.
The early years of retirement are a great opportunity to position your retirement accounts for lower taxes down the road. That could involve using Roth IRA conversions to lower required minimum distributions later or harvesting capital gains at a 0% federal tax rate. Those opportunities are harder to take advantage of when you’re already collecting Social Security.
So, the unfortunate truth is you could end up paying a lot more in taxes both this year and in the future by claiming Social Security at age 62.
