If you need the money for living expenses, there is little question of whether you should take them. However, there may be other reason to begin benefits early. You may be able to delay withdrawing from tax deferred retirement savings accounts; thus, allowing them to continue to grow. You also do not know what the future holds. Why not take the money now while you can enjoy it?
A financial adviser can run multiple scenarios to help you determine the optimal time to take Social Security benefits. The calculations, however, become more complicated if you are still working. While the Senior Citizens’ Freedom to Work Act of 2000 eliminated the retirement earnings test for those who have attained full retirement age, an earnings limit is still imposed on those who file for benefits early.
In 2013, if you are between age 62 and 65, you can earn $15,120 without a reduction in benefits. For every $2 you earn above this limit, your benefit is decreased by $1. For example, let’s say you are 62 and currently employed, earning $30,000 a year. Your estimated benefit at full retirement age is $1,500 per month, but you decide to take your benefit early at age 62; therefore, your benefit is reduced to $1,125. Because you are earning $14,880 above the income limit, your annual benefit is reduced by $7,440. For the first six months after you file, your benefit is withheld. In the following month, you should receive a partial benefit of $435. You should receive your full benefit of $1,125 for the remainder of the year.
Alternatively, you may consider working part-time to bring your income closer to the annual income limit. Let’s say you are able to switch to part-time with an annual salary of $16,500. You earn $1,380 above the income limit, so your benefits should be reduced by $690 in the first month. Afterwards, you should be eligible for your $1,125 benefit for the remainder of the year. With your annual income from your employment and your Social Security benefit, you should be close to $29,300, annually. While this is less than what you were making with full time employment, the added enjoyment of a partial retirement may be worth the “pay cut.”
If you are faced with a reduction in benefits as a result of the earnings limit, your benefits should automatically be reinstated once you reach full retirement age. For any month your benefit was withheld or reduced, your benefit will be increased at full retirement age. Your earnings during this time may also increase your average earnings and could increase your monthly benefit amount.
Taking Social Security benefits early at age 62 may not be the best choice for everyone. The income earnings limit is one of the many factors you should consider before deciding the best time for you to apply for benefits.