3 Reasons to Take Social Security Early

Most think it’s a no-brainer to delay, but here are 3 reasons to take Social Security early that may benefit you in retirement.

Introduction

A no-brainer. That’s the term for those decisions in life that are easy. It’s an automatic that you go a certain way and there’s no thought needed. To do anything else would be foolhardy.

Certainly the case when it comes to Social Security. While you’ve heard you can retire sometime shortly after entering your 60s, it’s a no-brainer you will wait a little longer until you get the full amount owed. You’ll be better off, so resist the temptation and you’ll be rewarded over the longer term.

Except, that’s not necessarily the case. Quite often you might be better off, especially if you go on to live many years, but there are circumstances where you can’t, or would in fact be better off starting the income flow provided by Social Security sooner than later.

In fact, many people view the decision to wait in terms of Social Security as such a no-brainer that they actually never bother to spend the time necessary to weigh out the pros and cons. To actually take time to determine what might be the best decision for their family and situation.

Truth is there are a number of reasons why you and your family might be better served taking the money sooner rather than later.

Today we look at key considerations regarding the decision as to whether to start your Social Security early versus waiting till you get older and are entitled to a higher payout.

What is the actual retirement age for collecting benefits?

When we’re asking ourselves the question of whether it makes sense to start collecting Social Security early, we first have to be sure we understand what early means. As in, at what age can we actually start to collect the benefit at all.

According to the agency that administers the Social Security benefits program, the Social Security Administration or SSA, you can potentially begin to receive the benefit at any age if you are disabled (with restrictions and provisions), but otherwise at age 62, no matter when you were born.

With all that in context, the issue of taking your benefits early actually boils down to turning them on sometime after turning 62 and before you reach your full retirement age, also known as FRA.

What is FRA?

Your FRA is based on when you were born and it is the date when you are entitled to begin receiving 100-percent of the Social Security benefits the SSA has determined you are entitled to in retirement.

Your FRA does vary based on your birth year. For example, if you were born in 1958, your full retirement age would be 66 years and 8 month. Were you to retire at age 62 when first eligible to collect your benefits, you would be retiring 56 months early and your benefit checks would be discounted approximately 28.33-percent, according to the SSA.

If instead you were born in 1960 or thereafter, the FRA is age 67. If you retired when you turned age 62  you would be retiring 60 months early and your benefit checks would be discounted by approximately 30-percent from what you would have received if you retired at your FRA.

This SSA chart demonstrates the discounted percentage benefit (based on your birth year) that you would receive if you started Social Security at age 62.

Two important points to keep in mind regarding retiring early and your Social Security benefits:

• Once you begin taking Social Security it is generally permanent, so whatever percentage discount you receive when starting the benefits will remain in place for the remainder of your life
• Each month that you hold off from retiring after turning age 62 will reduce the discount percentage, right up until your FRA

You can calculate what your benefits reduction would be for starting your Social Security payments early here.

Quick point – if instead of starting Social Security benefits early, were you to elect to continue to delay taking your Social Security benefits up to FRA, and thereafter up until age 70, you would actually receive enhanced benefits beyond 100-percent for the remainder of your life. You can view a table detailing the monthly percentage increase for delaying past your FRA to age 70 here.

The way it works

As someone considering taking Social Security early, you need to know how it really works in terms of how much of your benefit is discounted from the age you reach eligibility at 62 up until you reach FRA.

According to the Social Security Administration, first you must qualify by being age 62 for an entire month to become eligible. Assuming you were born in 1960 or thereafter, there are 60 months or five years before you reach your FRA and are eligible for 100-percent of your benefits.

Each month that passes from when you become eligible the discounted percentage amount is reduced by a small amount. So if you decided to start taking the benefit when you turned age 65 you would receive 86.7-percent of your full benefit and your spouse would be eligible for 41.7-percent.

Waiting one more year to age 66 you would receive 93.3percent of your full benefit and your spouse would receive by 45.8-percent.

You can actually review the SSA table here to determine how much of a discount you would incur based on when you decided to start taking your benefit early.

Three Reasons for Starting Your Benefit Early

Reason 1: You need the money

One of life’s hardest lessons – at the end of the day, you gotta do what you gotta do to get by.

Knowing now that your Social Security lifetime benefits could be reduced by up to 30-percent depending on when you start taking the checks, the need to pay your bills currently might override the desire to wait until you reach FRA.

Whatever the reason, If you don’t have the money to pay your monthly bills, you need to find a source of income. Social Security is one of those sources that is guaranteed and would be available to you starting as early as age 62, even if it means reducing the amount of the benefit each month and over your lifetime.

A major contributing factor when it comes to needing the money is not being able to work. Whether ill or disabled, laid off from your work, needing to take care of a spouse or a dependent, or for any other reason, If you (and/or your spouse) can’t work, taking your benefits early might make the most sense.

Keep in mind that if either you and/or your spouse are able to work and wish to do so, you are able to continue working and also collect eligible benefits, as the SSA considers you retired when you elect to turn on your benefits.

There is a catch though. You can still begin taking benefits early as previously detailed, but there are earnings limits, at which point the SSA will withhold a percentage of the discounted amount you are due.

If you are more a year from the time you will reach FRA, they will deduct $1.00 for every $2.00 that you earn above the limit, according to the SSA. For 2024, that limit is $22,320.

In the months of the year you do reach your FRA (you can start receiving full benefit in the month following your birth month), they will deduct $1.00 for every $3.00 you earn above the limit, which for 2024 is $59,520.

Once you do reach your FRA, there is no earnings limit and the agency will no longer reduce your benefits, although you will have permanently locked in the discounted-percentage associated with when you originally elected to start taking Social Security payments.

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Reason 2: You want the money

A big reason to decide you might want to start your benefits early is the fact you prefer to get the money sooner rather than later.

On the investment side, this could be because you believe you can do better with the money than the government. Or you might want to purchase and help fund an annuity that could be used for you or your spouse.

But there’s other areas that might matter to you as well, such as starting a business, to help fund a purchase (help pay for that small boat so you can use it sooner than later while you are still in good shape to use it), or even quality of life, like adding a home addition.

That said, it’s worth noting that the government is guaranteeing you up to 30-percent more by simply waiting five years to start. That’s not something that should be taken lightly, especially when you look at some of the recent years in the market. Not a bad return for no market risk.

Speaking of that “risk” word, which is generally something many are anathema to when it comes to retirement and the markets. You may become more adverse in the future to risking as much market exposure and prefer to start a separate income stream that allows you to back away from the market.

That’s a big decision – one we often caution that you should engage in carefully before doing so – but depending on your circumstances it might make sense.

There’s another potential risk of a different sort. Namely, one that not enough people are paying attention to that we certainly believe you have to at least be aware of – the risk that Social Security might change.

In fact, given that the program that money is paid out of (Old-Age, Survivors, and Disability Insurance or OASDI) is projected to go insolvent in 2033, there’s a sure likelihood that something will occur with Social Security.

There’s all kinds of ideas being bandied about in Congress (who will have to act) to determine how to deal with the situation.

From increasing retirement age to cutting the benefits by varying degrees, and even the notion of instituting means testing. WOW! See the recent Trump Tax Cut video to see what Troy says about the issue of potential means testing. Eye opening!

Whatever does happen, you may want to start receiving your payments earlier than later, given what might be done to sure up the program. That’s a major uncertainty at this point, which is another type of risk.

Reason 3: You’re worried you won’t be around to collect later

Aside from health affecting your ability to work to make ends meet today, there is a major issue that might impact how long you will be able to collect – longevity.

While most avoid the issue, fact is it should be addressed by everyone as they approach and enter retirement. If you and/or a spouse come from a family that doesn’t tend to live long lives, than it might make sense to start taking the money early.

Even if you can work, but have health issues, you’re almost certainly going to have to deal with increased health-related costs, especially if you have chronic conditions. Again, It might make more sense to take the money sooner than later, enabling you to better deal with healthcare costs and issues that are sure to come into play as you age up.

Other Major Consideration

Taxes and SS

So you’re making a big decision in terms of when to start taking Social Security. One other major consideration is that of taxes you might pay.

Quite often people believe they won’t pay taxes on Social Security, but that can be an incorrect assumption. In fact, you can pay the IRS taxes on up to 85-percent of what you receive in payments from the SSA.

Here’s how it works:

The IRS looks at what they consider your “combined income.” This equates to your adjusted gross income plus nontaxable interest plus half of your Social Security benefits, according to the agency.

• If you file as an individual and combined income is $25,000 – $34,000, you may have to pay income tax on up to 50-percent of your Social Security benefits
• If you file as an individual and combined income is more than $34,000, you may have to pay income tax on up to 85-percent of your Social Security benefits
• If you file a joint return and your combined income is between $32,000 – $44,000, you may have to pay income tax on up to 50-percent of your Social Security benefits
• If you file a joint return and your combined income is more than $44,000, you may have to pay income tax on up to 85-percent of your Social Security benefits

Obviously, when making your Social Security determination you want to be sure you consider the possibility of paying taxes on the SS money you collect for 2024. One note on that issue is there is a current proposal to end taxing Social Security starting as early as tax year 2025, and there seems to be interest on both sides of the isle on making this happen.

Spousal benefits

Another area to consider in this process of determining if it makes sense to start your benefits early is that of your spouse, if in fact that is a relevant issue.

When it comes to an eligible spouse, they can receive up to a maximum of 50-percent of your benefits amount when you reach FRA (a smaller percentage if you start collecting earlier), but that is based on their FRA. If they are less than their own full retirement age, that percentage of spousal benefit they receive is forever reduced.

Also, they can elect the spousal benefit or their own SS benefit, whichever amount is higher. They cannot collect both their own Social Security benefit and the spousal benefit.

One last point is the fact that if you die, you spouse can be eligible for survival benefits; up to 50-percent of your FRA benefit.

The earliest they could receive survivor benefits is age 60 (50 if disabled), but they would receive a reduced monthly benefit amount depending on their age, up to their FRA. If they elect to delay until their own FRA, they would be eligible for the full surviving spousal benefit amount.

Breakeven analysis

There’s one last major consideration when it comes to when it might make sense to start your Social Security checks. Even if you feel certain you have to start early and it may make sense, doing a breakeven analysis can provide you with good information and may help you in making your final determination.

To provide better context, let’s use an example utilizing breakeven analysis:

• FRA – age 67
• FRA benefit – $2,000 p/m
• Age when you begin benefit – when first eligible/age 62
• Discount – 30-percent monthly or $600 p/m
• Monthly check – $1,400 ($2,000 – $600)
• Months until FRA at age 67 – 60 m/
• Amount received up to FRA – $84,000 (60 x $1,400)
• Total number of months for the amount you would receive by waiting five years to your FRA versus taking early payment starting at 62 – 140 months ($84,000/$600)

That means it would take you 140 months to reach the point where waiting to receive your full benefit would be equal to the amount you collected by starting SS payments at age 62. In years that equates to approximately 11 years and seven months, making you 73 years and seven months old when you would reach breakeven, according to the SSA.

From that point, every month thereafter you would receive $600 less in Social Security income had you waited to begin payments until your FRA. Over a decade that would equate to a difference of $72,000.

That’s definitely food for thought when it comes to deciding if it’s better for you to take the benefits early or to wait until your FRA, or even beyond to age 70.

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Conclusion

We believe in a lot of no brainers just as you do – in many areas of life you can trust them. Brush your teeth, eat your vegies, try hard in school, go to the doctor for an annual checkup…

There are many things in life that are so tried and tested that you should just do them, period. Definitely holds true with money and finances. Start investing very early to take advantage of compounding interest, don’t put all eggs in one basket, create a financial plan, start putting away for retirement as early as possible, be disciplined, and more.

But… there are also many things where you have to actually put thought into something before proceeding.

You know this. You’ve dealt with the myriad decisions that life calls on you to make, starting young and that will continue to pop up over the course of the remainder of your life. Many can be easy, others not so much.

When it comes to that of when to start your Social Security, as demonstrated, it’s not always so easy. To make the best decision for you and your family, it’s best to do a full assessment.

Doing so to determine if waiting that five years makes the most sense, especially given you are well into the second half of your life and each year really starts to count.

Taking time to determine the impact of starting to take Social Security benefits early can actually make the final decision easier and leave you with confidence you’re making the right move, whatever you decide.

Aside from that decision, retirement will certainly present you with many other important questions that need careful consideration. To deal with that, you will need to lean on expertise and a solid financial plan.

Fact is retirement can get very complicated and frankly you’d be best served working with a proven team who can help you navigate your golden years.

At Oak Harvest we’d be happy to consult with you to assist in the decision as to when to start your SS benefits. And we can look at your current retirement plan to determine if it can really meet your goals.

Or we can assist you by creating a retirement plan capable of helping you do so. We can build a holistic, comprehensive retirement plan addressing relevant issues, utilizing strategies that cover your Social Security, taxes, income, spending, healthcare, legacy, and more, customized to your family’s specific needs.

A plan created with the goal of ensuring you can successfully live out the retirement you and your spouse envision.

If you are ready to take the next step and talk to a team of financial advisors and retirement planners who can advise on all your retirement needs, and who will put your interests first, Schedule a call today!

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