Social Security is a vital retirement benefit that provides financial support to seniors who have contributed to the workforce for many years. While many people choose to claim their Social Security benefits as soon as they are eligible, this decision can have negative consequences. In this blog, we will explore four problems associated with claiming Social Security early and why waiting until full retirement age may be a better choice.
One of the most significant problems with claiming Social Security early is that it can reduce the amount of benefits you receive. If you claim Social Security before reaching full retirement age, your monthly benefit will be permanently reduced. For example, if your full retirement age is 67 and you claim at age 62, your monthly benefit will be reduced by 30%. This reduction can have a significant impact on your financial security in retirement.
Claiming Social Security early can also increase your tax liability. If you continue to work while receiving Social Security benefits, you may be subject to the “earnings test.” This test reduces your Social Security benefits by $1 for every $2 you earn above a certain threshold. This means that if you claim Social Security early and continue to work, you may end up paying more in taxes than if you had waited until full retirement age.
In addition to the earnings test, you will also owe federal income taxes on your benefits. The amount of taxes you owe will depend on your total income and tax bracket. If you have other sources of income in retirement, such as a pension or IRA withdrawals, your Social Security benefits may be subject to federal income tax.
Claiming Social Security early can increase the risk that you will outlive your retirement savings. If you claim Social Security early and live a long life, you may run out of money in your later years. This can be especially problematic if you have health issues that require expensive medical care. Waiting until full retirement age can help mitigate this risk by providing you with a larger monthly benefit that can last throughout your retirement years.
Considering your spouse when deciding whether to claim Social Security benefits early is an important factor that many people overlook. If you are married, your spouse may be entitled to spousal benefits based on your work record. However, if you claim Social Security benefits early, your reduced benefits will also reduce the amount of spousal benefits your spouse can receive in the future. This can be especially problematic if your spouse has little or no work history of their own and is relying on spousal benefits to supplement their retirement income.
Waiting until full retirement age can help ensure that your spouse will receive the maximum spousal benefit possible. In addition, if you delay claiming Social Security benefits until age 70, you may be able to increase your own benefit and, in turn, increase the amount of spousal benefits your spouse can receive.
In conclusion, claiming Social Security benefits early may seem like an attractive option, but it can have negative consequences. By waiting until full retirement age, you can avoid reduced benefits, increased taxes, longevity risk, and potential reductions in future spousal benefits. It’s essential to consider your spouse’s retirement needs when making your decision about when to claim Social Security benefits. If you are unsure about the best course of action, be sure to consult with us to determine the best option for your unique situation.