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Avoid Taking Social Security Early

By Jane Young

The economic challenges presented by COVID-19 may have some considering taking Social Security benefits before their full retirement age (FRA).  This is rarely a wise financial move unless you are completely out of other options to cover living expenses or you have a serious medical condition that may shorten your life expectancy.  A recent study by the University of Michigan found that it was only optimal for 8% of the respondents to take Social Security early.  They also found that the average household would lose about $110,000 by taking Social Security before their FRA.

The FRA for someone born between 1951 and 1959 goes from 66 to 67.  The full retirement age for those born after 1959 is 67.  The Social Security life expectancy for a 65-year-old male is 84 and for a 65-year-old female is 86.5.  Married people tend to live longer with a high probability that one spouse will live beyond 90.

You can take Social Security as early as 62 but this could result in a reduction of up to 30% in benefits.   Your benefits are reduced 5/9 of a percent for each month you take benefits before your FRA up to 36 months and 15/12 of a percent for each month thereafter.  On the other hand, by taking your benefit after your FRA you can earn delayed retirement credits of 8% per year up to age 70.   Regardless of when you start taking Social Security, you need to enroll in Medicare by age 65.

If you are working, there additional drawbacks to taking Social Security benefits before your FRA.  If you earn more than $18,240, while you are younger than your FRA, you will lose $1 in benefits for every $2 over the income limit.  This changes to $1 for every $3 when you earn over $48,0000.  This is temporary because your benefit is recalculated once you reach your FRA.

The second drawback to taking benefits early is the adverse impact it may have on your taxes.  A larger portion of your Social Security benefit will become taxable if you are still working.  The amount of Social Security that is taxable is dependent on your income up to 85%.  If you wait to take benefits after you stop working a lower percentage of you benefit may be taxable.

Most retirees depend on a combination of Social Security, investment income and pensions to cover retirement expenses.  Having a larger Social Security benefit can provide greater stability and peace of mind when combined with an investment portfolio that varies with fluctuations in the stock market. If you live longer than expected a larger benefit, due to starting benefits later, can provide added insurance to help cover retirement expenses.

If you do not immediately need benefits to cover living expenses, and you are in good health, wait and take your benefits at your FRA or as long as possible up to age 70.