Dear Carrie: I’m turning 62 this fall and looking forward to starting Social Security. My good friend told me it’s better to wait, but I’m eager to supplement my income. How do I decide? — A Reader
Dear Reader: I get this question a lot and I’m always happy to answer it because I think it’s so important. Of course, taking Social Security at the first possible opportunity is an option. And depending on your personal circumstances, it might be the right decision for you.
But while it’s tempting and very common — more than three-quarters of eligible workers file early according to the Social Security Administration (SSA) — my concern is that a lot of folks don’t think about what taking benefits before full retirement age (FRA) means in terms of dollars over your lifetime. So while you’re trying to decide, I suggest you consider the following financial repercussions.
Your Benefits Will be Permanently Reduced
While everyone who has earned enough work credits is eligible to take Social Security at age 62, if you do, the SSA reduces your benefits by 25 percent — for life. That could be a pretty good reason to wait. On the opposite end, for every year you delay between your FRA and age 70, you’ll get an increase of 8 percent. That could be an even better reason to hold off.
Now let’s put that into dollars. Let’s say your full Social Security benefit at 66 would be $1,000. Take it at age 62, and you’ll get only $750. Hold off until age 70, and it goes up to $1,320. That’s a pretty significant spread. Of course, the amount you’ll collect over time depends on the size of your monthly benefits and how long you live. Using the same example, if you live to 78, you’ll pretty much break even whether you begin collecting at 62 or 66.
And the longer you live, the more the numbers favor waiting. Consider this: If your full benefit at 66 would be $1,000 but you file at 62 and live to 95, you’ll collect almost $100,000 less than the 95-year-old who waited until age 70.
If You’re Still Working, Some of Your Benefits Will be Withheld
You mention supplementing your income, so I’m assuming you plan to keep working for a few years. If so, realize that when you file for Social Security benefits before your FRA and your earnings exceed certain limits, part of your benefit will be temporarily withheld.
In 2015, if you file at 62, $1 in benefits will be withheld for every $2 you earn above $15,720. In the year prior to your FRA, $1 is deducted for every $3 you earn above a higher limit, currently $41,880. Once you reach your FRA, there’s no deduction and you’ll get the money previously withheld in the form of a higher benefit, but the withholding will have an impact on your payout during your pre-FRA years.
And regardless of age, as much as 50-85 percent of your benefit may be subject to income tax if your modified adjusted gross income (MAGI) is above certain levels, currently $25,000 for single filers, or $32,000 for married filing jointly. Another consideration: your Social Security benefit could actually bump you into a higher income tax bracket.
Survivor Benefits for Your Spouse Will be Less
If you’re married, and you predecease your spouse, taking Social Security early would also reduce his or her monthly spousal survivor payout. It may seem a long way off, but it’s something to consider if your spouse will be collecting on your work record.
On the Plus Side, a Child Under 18 Could bump up the Family Benefit
While I’ve been focusing on the downside, if you have unmarried children or grandchildren who are your legal dependents, you could get a bit of an increase as a family no matter when you file. Children under 18 (up to 19 if a full-time student in elementary or secondary school) or a disabled child can receive a monthly payment of up to one-half of your full retirement benefit — with a family limit of between 150 to 180 percent of your full benefit. If it applies, it’s worth noting as you do your calculations.
Do the Math Before You Decide
Like most other financial decisions, deciding when to file depends on your personal circumstances. If you need the cash now to make ends meet, by all means take Social Security at the first opportunity. But if you can manage without it, I think it’s important to at least consider waiting.
Do the math. Talk to your spouse. Consult with your financial advisor. It’s worth the effort because the decision you make now will have very real financial repercussions both for the present and the future.
For the record, if you do decide to take your benefits at age 62, the SSA gives you the chance to change your mind during the first year — as long as you pay back any benefits that you’ve received. But I urge you to think it through before filing to save yourself time, money and potential aggravation.
Carrie Schwab-Pomerantz, CERTIFIED FINANCIAL PLANNER ™ is president
of the Charles Schwab Foundation and author of “It Pays to Talk.” You can e-mail Carrie at firstname.lastname@example.org.