Social Security Rule Deals Early Filers a Double Whammy

Filing for Social Security early can seem like a practical move, especially if you’re looking to retire or are being forced to leave your job for reasons outside your control, such as downsizing. But there’s a major problem with claiming Social Security ahead of full retirement age, which is 67 for anyone born in 1960 or later.

Filing for benefits early means reducing them in the process. If your full retirement age is 67 and you claim Social Security at 62, which is the earliest possible age to sign up, you’ll slash your monthly checks by about 30%. That could become a serious problem over time, especially if your retirement income needs rise or your limited savings run out.

But that’s not the only issue with claiming Social Security early. Reduced benefits aren’t the only hiccup you might encounter.

The earnings test could trip you up

Not only does claiming Social Security early generally result in a permanently reduced monthly benefit, but it also subjects you to an earnings test if you decide to keep working. Exceeding the limit of that earnings test could mean having benefits withheld temporarily.

Under current rules, you temporarily lose $1 in Social Security for every $2 or $3 above the earnings-test limit, depending on your age. That limit changes from year to year. Right now, it’s $24,480 if you won’t reach full retirement age by Dec. 31, or $65,160 if you will reach full retirement age by Dec. 31.

So let’s say you’re 62 and taking benefits this year. If you’re still working and earn more than $24,480, you’ll have $1 in Social Security withheld per $2 of income beyond that threshold.

You’ll get the money back eventually in the form of larger checks once full retirement age arrives. But you’ll still be looking at permanently reduced benefits due to your early filing. In other words, it’s the withheld amount you’ll get back, but the reduction for filing early still stands.

Weigh your filing decision carefully

It can be tempting to file for Social Security as soon as you’re able to. But if you’re still working once you become eligible, it could pay to sit tight until full retirement age or beyond rather than claim benefits early.

If you’re getting a decent amount of income from a job, you may be able to reduce spending temporarily to make that situation work, allowing your Social Security benefits to grow. And you might then truly appreciate having larger monthly checks to look forward to for the rest of retirement.