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Here’s why you should not take early Social Security payments

The monthly benefit you receive from Social Security depends on various factors, including the amount you have contributed to the system throughout the years and the timing of your decision to begin collecting benefits.

The best option is to claim benefits at the ‘designated’ age (posted above) so you can receive your full benefit amount. But, it is possible to opt for early payments at 62 in exchange for lower benefits:

Most people opt for early payments because they don’t feel they’d love enough to enjoy full benefits or they need money. In fact, about 36% of eligible men and 39% of eligible women claimed benefits at age 62 in 2008.

Early payments, however, aren’t recommended due to these reasons:

• You will receive reduced benefits for the rest of your life if you claim before the full age. For example, individuals born in the 1960s or later will receive 30% less each month if they choose to avail benefits at 62 compared to receiving benefits until attaining the full retirement age.

• You’ll get less money due to the living adjustment concept that accounts for inflation. Beneficiaries will receive a 3.2% increase next year (8.7% in 2023). So how does it impact you? Look at numbers. Someone born between 1943 and 1954 who currently receives a full monthly benefit of $2,000, for example, will receive an extra $64 each month.

• You will lose money if you earn more than the ‘designated’ amount. In 2023, you’ll lose $1 from your benefits for each $2 you earn above the limit that is $21,240 this year and will go to $22,320 in 2024. If you turn full retirement age in 2023 or 2024, it will deduct $1 from your benefits for each $3 you earn above $56,520 until your birthday month. Not many people consider it a con since since this money is returned once you reach the full retirement age, but it means less to spend in the meantime.

A few more things to consider

When considering the timing of your Social Security benefits, it's essential to evaluate various factors that can influence your long-term financial well-being. Here are some important points to consider:

• Spousal and Survivor Benefits: Claiming early can reduce not only your benefits but also those available to your spouse. Understanding these effects is crucial, especially in the context of long-term planning.

  • Reduced Survivor Benefits: When you claim early, you reduce not only your benefits but also the survivor benefits your spouse may receive after your passing. If you opt for benefits at age 62, your monthly payment could be reduced by up to 30% compared to waiting until your full retirement age. This reduction affects your spouse's financial cushion since, upon your death, they can only claim the higher of your benefits or their own. Therefore, if your benefits are lower due to early claiming, your spouse may face financial strain later in life.

  • Impact on Household Income: Many couples rely on a combination of both spouses' Social Security benefits for financial stability in retirement. If one partner claims early and reduces their benefits, the couple may find themselves with insufficient income, especially if they live longer than expected. This situation can necessitate drawing from retirement savings or other income sources, potentially jeopardizing the couple's long-term financial security.

  • Consideration of Spousal Benefits: If you are married and one spouse has significantly lower earnings, it may make sense for the higher-earning spouse to delay claiming benefits. By doing so, they can increase their monthly benefit, which not only bolsters their own income but also increases the survivor benefit available to their spouse. For example, if the higher earner delays benefits until age 70, the surviving spouse will receive the larger amount, which can make a substantial difference in their financial well-being.

  • Planning for Longevity: With increasing life expectancies, many retirees face the possibility of living into their 90s or beyond. This longevity risk means that planning for both partners' financial needs over a potentially lengthy retirement is crucial. If one spouse claims early and the other relies on that reduced benefit, the family may find themselves financially constrained later in life.

  • Communication and Joint Strategy: It's essential for couples to communicate openly about their Social Security claiming strategies. Discussing each partner's retirement goals, health status, and expected lifespan can lead to a more informed decision. Working together to evaluate when to claim Social Security benefits can help maximize the total lifetime benefits received and ensure financial stability throughout retirement.

• Investment Opportunities: If you choose to delay benefits, you can potentially invest those funds for growth. This strategy allows your savings to compound over time, potentially leading to a larger nest egg when you eventually begin to withdraw benefits.

• Inflation Considerations: Early claims can diminish in purchasing power over time due to inflation. While you receive a fixed monthly benefit, the cost of living may rise, eroding the value of those payments. By delaying benefits, you lock in a higher base amount, which increases over time with cost-of-living adjustments.

• Tax Implications: Early withdrawals may push you into a higher tax bracket, impacting your overall income. Understanding how Social Security benefits are taxed is crucial; for example, if your combined income exceeds certain thresholds, a portion of your benefits may become taxable.

• Alternative Strategies: If you're concerned about financial security, consider part-time work or other income sources in retirement to supplement your Social Security benefits. Consulting a financial advisor can also provide tailored strategies based on your unique situation.

Is a reversal possible?

It is common for people to regret opting for early benefits. Fortunately, there is a way to reverse the situation. Called a withdrawal, this feature allows users to cancel an application for up to 12 months after becoming entitled to retirement benefits.

This option can be exercised just once and users will have the option to reapply for benefits at a later stage. However, remember that you will have to repay any Social Security benefits you received, including any money that was withheld from your benefits to pay Medicare premiums, if you choose to withdraw.

Check this video for more tips, including the dangers of delaying SS:

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