How much Social Security retirement income will you lose if you take benefits early?
The Social Security system is set up so that eligible workers and the beneficiaries of deceased eligible workers can start taking Social Security Benefits as early as age 62; age 60 for a spouse of a deceased worker. This can sound like a good idea, but how much money will it cost you if you start your benefits early?
Full, or normal retirement age, as far as Social Security is concerned is determined by the year you were born. This chart shows you that individuals born in 1954 reach full retirement age in 2020 at age 66 and those born in years after this gradually have their retirement age increased until those born after January 1st 1960 reach Normal retirement age when they reach age 67.
Knowing the age someone turns normal retirement age allows us to figure out how much benefit they will lose by taking it early. From figure 1. you can see that early recipients lose 6.67% per year in earlier years and in later years 5% is lost. These losses add to a potential 30% reduction in full retirement benefits.
Broken down in figure 2 is how much you would lose each month. It breaks down to 5/9th of a percent for months between ages 62 and 63, 63 and 64 and 64 and 65. After that, you start to only lose 5/12 of one percent.
As an example, imagine someone born on January 2, 1960 whose full retirement age is 67 years old and would have earned an entitlement of $1,000 per month. This person will turn 62 years old in 2022 and if they want to receive benefits early, they could apply for benefits up to 4 months before the 62nd birthday.
Suppose this person waited to apply for the social security retirement benefits until March 1st, a month later than eligible. With a normal retirement age of 67 this retiree loses 5%, or 6.67% each year as shown in figure 1. Up to that 30% maximum.
$1,000 per month full benefit – 30% = $700 reduced benefit
But, the person in this example was late to apply and started taking benefits one month after eligible and since the retiree was a month late, they get that one month credited back at 5/9th of a percent which adds back $5.50 so your monthly benefit is now $705.50
If you do take benefits early and you plan to continue working you need to understand the Social Security Earnings Test.
The Earnings Test is how Social Security benefits are reduced when a worker takes them earlier than full retirement age while still earning an income. If you are considering taking early benefits you may also want to watch our break-even presentation as well as how social security is a hedging strategy with an investment portfolio.
The fact of the matter is there are many factors to consider when determining when someone should begin their Social Security and each individual recipients’ circumstances are different. Working with a financial planner from Decision Tree Financial who understands Social Security and how it interacts with other parts of your financial life can help you make the right decision for your future.
