Vanguard Warns This Social Security Trap Is Costing Retirees
There are many older Americans today who are living on just
Social Security. And Vanguard, citing data from the Social Security
Administration, says those benefits represent about 31% of the income of people
over age 65.
The problem is that many people end up filing for Social Security sooner than
they should. And that decision could have a negative impact on their finances
for the rest of retirement.
The earliest age to sign up for Social Security benefits is 62, but here’s why
Vanguard says claiming early may not be the smartest move.
Find Out: 13 moves seniors could benefit from but often forget about.
1. Claiming early could cost you
Even though you’re able to sign up for Social Security at 62, doing so may not
be your best move, since it results in smaller monthly benefits compared to
waiting for full retirement age (FRA), which is 67 for people born in 1960 or
later.
“Just because you can collect payments immediately doesn’t mean you should,”
Vanguard advisor Ed Campagna writes. “Your personal strategy to get the most out
of Social Security should depend on many factors.”
While claiming Social Security at 62 could make sense for people who do not
expect a long lifespan, for those who expect a typical life expectancy or
longer, an early claim could lead to less monthly income and less
lifetime income. That could become even more problematic for those who lack
retirement savings.
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2. An early claim could result in withheld benefits
Campagna warns that there’s another pitfall you might encounter if you claim
Social Security early: the earnings test. At FRA, you could earn any amount of
money without having Social Security withheld. Prior to FRA, there’s an earnings
limit to worry about. That limit changes every year. But exceeding it could
result in having benefits withheld temporarily.
In 2026, you’ll have $1 in benefits withheld per $2 in earnings above $24,480 if
you do not reach FRA by the end of the year. If you do reach FRA by
year-end, you’ll have $1 in benefits withheld per $3 of earnings above $65,160.
That money would come back to you eventually in the form of larger Social
Security checks once FRA arrives. At that point, the SSA would recalculate your
monthly payments based on the amounts it withheld previously. But it’s important
to understand that filing early subjects you to the earnings test.
3. Filing early could reduce survivor benefits
Another thing to consider is that claiming Social Security early could reduce
survivor benefits in your household. If you’re the higher earner in your
household and you pass away before your spouse, they’ll be eligible for survivor
benefits each month.
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Those benefits equal the amount you collected monthly while you were alive.
If you shrink your own benefits with an early claim, you could end up leaving
your surviving spouse with a lot less retirement income.
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4. There’s a way to undo an early claim
Vanguard explains that if you end up claiming Social Security early and realize
it’s not the best decision, you do potentially have an out. You could withdraw
your application for benefits and repay the SSA the benefits you received,
provided it’s been less than a year since you filed for benefits.
Keep in mind that if you go this route, you’ll need to pay back any spousal
benefits your spouse may have received based on your work record. You could also
suspend your benefits once you’ve reached FRA if it’s been more than a year
since you filed.
In that case, your benefit amount could increase every year until you turn 70 or
you start to receive Social Security again. Just know that if you suspend your
benefits, that would extend to spousal benefits.
5. Make sure you understand the program’s ins and outs
Social Security is a complex program whose rules are updated from time to time.
And one thing you don’t want to do is fall victim to a misunderstanding.
Vanguard points out that many people who collect Social Security have those
benefits taxed. And that rule did not go away as part of the One Big Beautiful
Bill Act (OBBBA), despite what some may think.
The OBBBA simply introduced a new $6,000 senior tax deduction that exempts many
Social Security recipients from owing taxes on their benefits. But the OBBBA did
not do away with taxes on those benefits completely.
Bottom line
Social Security remains a key income source for many retirees today. It’s
important to claim benefits at the right time and make a few essential moves
ahead of your claim.
Before filing for benefits, make sure to verify your earnings record at SSA.gov. Underreported wages could lead to smaller monthly
Social Security checks. Also model your break-even age, which is the age when
you’d get the same lifetime Social Security benefit based on different claiming
scenarios. That could help you decide when to file.
Finally, look at your broad financial picture when deciding when to take
benefits, including the amount of retirement savings you have and whether you’re
able to continue working or not. Putting time and thought into your choice could
help you eliminate
some stress living on Social Security.
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