At 62 years of age, Americans can begin claiming early Social Security benefits for themselves, provided they have been working and paying taxes. Claiming at age 62 may sound appealing, but there can be a substantial downside to the amount of money you can collect. In fact, you will receive 75% of the benefit amount that you would have received by waiting until your full retirement age, which is currently around age 66-1/2 depending on the month and year you were born.
But keep in mind that you are not required to file at your full retirement age. In fact, from your full retirement age up until age 70, you will receive an 8% increase in your monthly benefit amount by waiting to file. At age 70, that increase stops.
What if you don’t need the money, but decide to file at 62 in order to invest the benefit? Before you decide to take Social Security early and invest the payments, you need to be aware of the risks involved. Investing in the markets means you are assuming returns based on historical performance and subjecting your retirement outcome to market risk, including sequence of returns risk, where you may not have enough of a retirement time horizon to wait out any market downturns.
And if you’re still working while collecting, your earnings may end up in the government’s pockets if you make too much. In other words, taxes need to be considered as well, because if your primary income source is too high, your Social Security benefits may become taxable, lowering the amount you have available to invest.
According to the Social Security Administration website:
“If you are under full retirement age for the entire year, we deduct $1 from your benefit payments for every $2 you earn above the annual limit. For 2019, that limit is $17,640.”
That being said, some investments may not be counted as income by Social Security, and it’s important to work with a financial advisor when making these major decisions.
Continued from the SSA website:
“When we figure out how much to deduct from your benefits, we count only the wages you make from your job or your net profit if you’re self-employed. We include bonuses, commissions and vacation pay. We don’t count pensions, annuities, investment income, interest, veterans or other government or military retirement benefits.”
When it comes to age and benefit amounts, the Government Accountability Office (GAO) maintains that “the Social Security benefit formula adjusts monthly payments so that someone living to average life expectancy should receive about the same amount of benefits over their lifetime regardless of which age they claim.”
There are those that argue, however, that this model is outdated. Even though many experts say waiting as long as possible is the best strategy, it all depends on your individual situation. For example, if family history says your life expectancy is age 74, then filing early for Social Security benefits can make sense.
Another thing to consider is the complexity in determining how to factor in spousal benefits. If you’re married and die first, waiting to file may give your spouse larger survivor benefits.
How and when you claim Social Security can have a dramatic effect on your whole retirement outcome. The most important thing to do is get professional help in this process. That is what we do.