Title: The Downside of Collecting Social Security at Age 62
Navigating retirement planning can be tricky, and one of the crucial decisions you'll make is choosing when to apply for Social Security. The most popular age for claimants is 62, the first year they become eligible. However, this decision comes with some hidden drawbacks that many new applicants might not notice immediately.
Potential Loss of Benefits: The Retirement Earnings Test
When you opt to collect benefits before reaching your full retirement age (FRA) and continue working, you could experience a shrinkage in your monthly income due to the Retirement Earnings Test (RET). The test evaluates your annual income and reduces your Social Security benefits if you earn over a specific threshold.
The RET deducts $1 from your benefits for every $2 earned above the exempt amount. The limit varies every year to consider inflation. For instance, in 2025, the exempt amount is $23,400. For each dollar exceeding this limit, you'd only add about $0.50 to your overall income until eventually, your benefits are completely nullified due to the RET's effects.
To elaborate, an average 62-year-old with a monthly Social Security check of around $1,373, or $16,479 annually, could suffer a total loss of benefits with job income surpassing about $56,400. Thankfully, those lost benefits won't vanish but will be returned to you once you reach your FRA.
Increased Tax Obligations
Regardless of whether you work while receiving benefits, you might face additional income taxes. The federal government employs a metric called "combined income" to determine whether a portion of your Social Security income should be considered taxable. Combined income is calculated by adding half of your Social Security benefits, your Adjusted Gross Income (AGI), and any non-taxable interest.
0%
If your combined income surpasses certain thresholds, up to 85% of your Social Security benefits could be deemed taxable income. Here are the thresholds for a single and joint filer:
Less than $25,000
| Taxable Percentage of Social Security Income | Combined Income (Single) | Combined Income (Joint Filer) || --- | --- | --- || 0% | Less than $25,000 | Less than $32,000 || Up to 50% | $25,000 to $34,000 | $32,000 to $44,000 || Up to 85% | More than $34,000 | More than $44,000 |
Less than $32,000
When you claim benefits early, supplementing with other revenue sources like job income, retirement account withdrawals, or investments is quite common. This additional income likely contributes to your AGI, also increasing the likelihood of your Social Security income being taxed.
On the flip side, when someone waits to claim benefits, they will usually receive a larger monthly check. They could potentially draw smaller distributions from their retirement accounts or work fewer hours if their job permits. Consequently, they will have a smaller AGI and a lower risk of paying taxes on their Social Security benefits.
Up to 50%
Decreased Spousal and Survivor Benefits
$25,000 to $34,000
If you're the high-earning spouse, your partner might rely on your earnings record for their Social Security benefits. The good news is that spousal benefits are determined by your partner's claiming decision. If your partner waits until their FRA, they can receive up to half of your benefit amount at your FRA.
$32,000 to $44,000
The issue arises when claiming benefits earlier. You will leave less for your spouse, as you'll reduce your benefits by 30% if you claim at age 62 (if your FRA is 67, as with baby boomers and later generations). This reduction could translate into hundreds of lost dollars per month for your spouse.
More than $44,000
Claiming at 70 instead of 62 means that your spouse can enjoy 77% more in benefits compared to what they would get from your early claim.
Up to 85%
In conclusion, claiming Social Security benefits at 62 can result in lower payments, possible reductions due to the RET, and more complex tax implications, especially for self-employed individuals. Before making a decision, consider consulting a professional to discuss your personal situation, future employment plans, and retirement income requirements.
More than $34,000
In light of the Retirement Earnings Test, collecting Social Security benefits before reaching your full retirement age (FRA) while working could result in a decrease in your monthly income due to the deduction of $1 for every $2 earned above a specific threshold. This threshold, which varies annually, is an essential factor to consider when planning your retirement finance.
Furthermore, receiving Social Security benefits before reaching your FRA may lead to increased tax obligations, as part of your benefits could be considered taxable income depending on your Adjusted Gross Income (AGI) and other sources of income. Persons with combined income surpassing certain thresholds could potentially pay up to 85% taxes on their Social Security income.
