Three Traps to Avoid
- Taking Money Too Early. It can be tempting to start taking your benefits as soon as you become eligible at age 62. But the longer you can wait, the higher your monthly benefit will be—and the more you will receive over your lifetime. Also, cost of living adjustments (COLA) are calculated on the amount of your monthly benefit, so if you take benefits at age 62, your COLA adjustments will be calculated on a lower amount.
- Working Income. If you elect to take benefits early and you keep working, the amount of your benefit can be reduced. This reduction will continue until the year you reach full retirement age (66). In 2014, Social Security reduces benefits by $1 for every $2 of earned income above $15,480. For example, say you start benefits at 62 and you have earned income of $30,000. You are $14,520 over the annual limit, so you will receive $7,260 less in benefits (50% of the difference). However, the benefit reductions are not lost; they are deferred and credited to your benefits record when you reach full retirement age.
- Spousal Benefits. Your decision when to start taking your benefit affects your spouse too. After you die, your spouse is eligible to receive your monthly benefit if his/her own benefit is less than yours. If you elect to receive your benefit earlier rather than later, your spouse’s benefit will also be lower. If you wait until you reach full retirement age (66), you can claim your Social Security benefits but delay taking them. This lets your spouse draw spousal benefits immediately, while you continue working and increasing the value of your future benefits.
Actions to Consider
- If you are concerned about the future of Social Security, you could take your benefits at 62 and invest them. By the time you need to start taking the money, you may be able to make up any loss you incur by taking them early. But, of course, this is dependent on your portfolio allocation and market performance.
- If you keep working beyond age 62, your Social Security benefit will increase each year up to age 70.
- While you are eligible for Social Security at age 62, you are not eligible for Medicare until age 65. If you stop working, you will have to pay for private insurance with your own money.
- If you wait until your full retirement age (66), another spousal benefit option is available. If you both want to retire at the same time and your spouse will receive a lower benefit, you can claim spousal benefits now from your spouse, let your benefits continue to grow and then switch to your (higher) benefit later.