CHAPTER
7

Filing for Benefits Before Reaching Full Retirement Age

In This Chapter

• Consequences of taking benefits before your full retirement age
• When taking early retirement is a good idea
• Break-even age points for receiving benefits early
• The impact on your spouse and dependents if you receive benefits early

What is the number one question people ask about Social Security? “When should I take my Social Security?” says Angela S. Deppe, CPA, who runs Social Security Central (socialsecuritycentral.com), a website that offers educational tools including a simple benefit maximization calculator. “It’s a personal decision that should be based on multiple variables including your marital status, longevity, benefit amount, necessity of income, desire to continue working, and taxes. It’s especially important for married couples to make their decision jointly as your individual decision can impact your spouse long after you’re gone.”

Because deciding when to start taking Social Security benefits is one of the most important financial judgments you’ll ever make, we’re going to devote two entire chapters to this single decision. In this chapter, we’ll discuss the pros and cons of taking benefits early. We’ll provide you with information that will help you decide whether you should start taking your Social Security benefits early, at any age from 62 until you reach your full retirement age (FRA). In Chapter 8, we’ll probe the pluses and minuses of starting your Social Security benefits at your FRA or even as late as age 70, when monthly benefits reach their maximum amount.

Making the Decision

No matter what your FRA, you can start collecting Social Security benefits as early as age 62, at least for now. This may change if Congress decides to vote on a number of proposals that would increase the minimum retirement age beyond 62. But until that happens, the starting age at which you can file to begin receiving benefits is 62.

But should you take your benefits that early? One thing we can’t do is make that decision for you. We also aren’t advocating taking Social Security retirement benefits early, starting them at your full retirement age, or waiting until age 70. This is a very personal decision based on many factors, and one only you should make.

However, we can provide you with examples of what others have done, either on their own or with advice from a financial advisor. Some took Social Security early, and you’ll see how it worked out for them. You’ll learn how some of those who were married used strategies to maximize those early benefits by switching to spousal benefits when they reached full retirement age. You’ll also see how, if you’re divorced after being married for 10 years and have not yet remarried, you can receive spousal benefits from your ex-spouse, even if his or her current spouse is also receiving spousal benefits.

What Is Your Full Retirement Age?

One of the first factors you should be aware of in making this decision is your full retirement age. Your FRA varies from age 65 to 67, depending upon the year you were born. If you’re unsure what your FRA is, the following table can help you figure it out.

Age When You Can Receive Full Social Security Benefits

*The Social Security Administration (SSA) notes that anyone born on January 1st of any year should use the previous year to find their FRA. Also, for anyone born on the 1st of the month, the SSA computes your FRA as if your birthday occurred during the previous month.

There are numerous variables to consider when making the decision about whether to begin getting your Social Security retirement benefits as early as age 62.

How common is it for men and women to start their Social Security benefits at age 62? As Brian O’Connell points out in his September 23, 2014, article at Mainstreet.com, “Why 80 percent of women take Social Security too early,” “… more than half of Americans start collecting Social Security at 62—and four out of five women.”

Pros and Cons of Taking Benefits Early

Perhaps the most important negative variable you need to consider is that you’ll have a reduction in the monthly benefit you receive. This reduction will be calculated on what you would have received at your full retirement age, and will be lowered a certain percentage for every year prior to your full retirement age you began receiving benefits. For example, according to the SSA, if your full retirement age is 66 and you start your benefits at age 62, they will only be reduced by 25 percent. At age 63, the reduction is about 20 percent; age 64, 13.3 percent; and at age 65, it is around 6.7 percent.

At full retirement age your Social Security benefit would be 100 percent of its value based on your individual cumulative earnings, which were derived using the complicated Social Security formula described earlier in this book. (See “The Formula for Calculating Retirement Benefits” in Chapter 4.)

Let’s say you would be eligible for a $1,000 per month benefit if you wait to start collecting at your FRA of 66. But for a number of reasons, most of all that you are not working and need money to pay off debts, you decide to take your retirement benefits at age 62.

By beginning your benefits at 62, your monthly check will be reduced by 25 percent so you will receive only $750.

Unless you’re married and can switch over to spousal benefits when you reach your FRA, that reduced rate could continue for the rest of your life.

CAUTION

Each year you delay between 62 and your full retirement age, the amount of your monthly benefit increases until it reaches 100 percent at your FRA. Stated another way, the closer you are to your FRA when you begin collecting your Social Security retirement benefits, the smaller the reduction from the 100 percent of the amount at your FRA.

The following table shows you how your benefits will be decreased, based on the age before your FRA you begin taking Social Security.

Benefit Reduction if Your FRA Is 67, Based on the Age You Actually Start Benefits

Since you’ve been contributing to Social Security your entire working life, reclaiming this money as soon as possible is extremely tempting, especially if you’re not working and your previous work history gives you enough credits to start receiving Social Security retirement benefits.

But before you file early, carefully consider whether this is the best financial decision for you at this point in your life, especially if you’re the higher earner of a married couple. You must take into account several key factors:

• Your health
• Whether you’re working
• If you plan to continue working
• Whether you plan on returning to work
• Your estimated life expectancy

Don’t go by what your neighbor or your Uncle Ned did, or is doing. Their situations may not have any resemblance to yours. Everyone is unique. Even married couples have different decisions to make about when to begin benefits. These could be based on which partner is the higher earner, the age difference between spouses, income differences, and expected life spans.

The following table shows the financial impact of taking Social Security benefits at age 62 on a typical $1,000 per month benefit. It shows the impact on you as well as on your spouse, if he or she is getting a spousal benefit, of taking your benefits at 62 based on the year you were born, your full retirement age, and the months between age 62 and your FRA.

Full Retirement and Age 62 Benefit by Year of Birth*

*The SSA says people born on January 1st are considered to have been born in the prior year, so if you were born on January 1st of 1960, your birth year would be 1959.

Table courtesy of the Social Security Administration.

QUOTATION

“Most people are taking Social Security earlier than later, but they probably would have done things a little bit differently in hindsight if they had talked to an advisor. To me it’s a choice of when to take it. What can I do to make sure that I can wait for as long as possible? Is my job secure? Can I put more money into my 401K plan? Planning is key. Saving now rather than waiting. In general, you should wait to take your benefits as long as you can, but because of individual circumstances, there may be an income need to take it earlier.”

—Daniel Fisher, financial planner, Fisher Financial Group, Northbrook, Illinois

There are both pros and cons related to taking Social Security retirement benefits as early as 62, and most of them are related to your health and your financial situation at this particular time in your life. In the next few pages, we’re going to explore a range of these situations and considerations so you’ll see what factors you should also be reviewing, on your own or with a financial advisor.

Health Considerations

In terms of deciding to start taking Social Security benefits at age 62 or any other age before reaching your full retirement age, which could range from 65 to 67 depending on when you were born, the state of your health and your family’s history regarding longevity are paramount.

If you’ve been diagnosed with a terminal illness and given a finite number of years to live, taking Social Security as early as age 62 might make the most sense. On the other hand, your condition might make you eligible for disability if your illness impairs your ability to work. In that case, it may be more beneficial to apply for disability and postpone your retirement for as long as possible to allow you and your spouse the benefit of a larger monthly payment because you waited. (If you think this describes your situation, please refer to Chapter 9.)

CAUTION

Your family’s health history will show if you are more likely to inherit a medical condition that could dramatically shorten your life span, in which case you might take that into consideration when you decide when to start taking your benefits.

Of course, no one really knows how long he or she is going to live. But you can make an educated guess based on a number of factors, such as your health history. Are you obese? Do you have high blood pressure? Do you have diabetes, heart problems, or a history of cancer?

Another health consideration is if the job you have is actually making you sick. Sometimes a job can be emotionally or physically debilitating to the point that remaining in that position might even shorten your life. In this case, retiring as early as possible and taking Social Security benefits could actually be just what the doctor ordered. Ironically, taking earlier retirement and receiving Social Security benefits from age 62 might actually extend your life.

Longevity is always a factor in deciding when to begin receiving retirement benefits. Consider this: in 2014, the average life span for a man 65 years old was another 19.3 years to age 84.3, and for a woman of the same age another 21.6 years to age 86.6. (For a more extensive discussion of life expectancy, see the section “Determining Your Life Expectancy” in Chapter 8.)

Armed with this information, you may want to rethink taking Social Security benefits too early. On the other hand, other factors, such as your current financial situation, could dictate the need for receiving those benefits as soon as possible.

TIP

If you’re in dire financial straits, you have been diagnosed with a terminal illness, you have a family history of premature death due to heart problems or cancer, and you no longer want to work but your company pension, savings, or other sources of income are not enough, taking Social Security as early as age 62 may be a better option for you. Weigh your options carefully and, if you have one, consult your financial advisor to discuss your plans.

Retiring Without Enough Saved

If you can afford to, and your health is excellent with a long life expectancy, most financial experts recommend you wait as long as possible to take Social Security benefits. If you can’t afford to retire, the next consideration becomes whether you need to start taking your benefits early purely for economic survival because you aren’t earning enough to cover your bills. If you need the funds just to make ends meet, you may have to start collecting benefits before you reach your FRA.

Here are some typical scenarios for those who took Social Security before their FRA:

Sixty-seven-year-old Bill began taking his Social Security benefits at age 63, when he returned from an out-of-town job that ended after three years. He decided to use his relocation with his wife back to his hometown as an opportunity to retire. He began receiving benefits early because he wanted that additional monthly benefit, which he used to supplement his company pension. That extra money each month made retirement economically feasible for him.

When she was 62, Beverly began her Social Security benefits because she was only working part-time making less than the income cap on those who take benefits early, which in 2014 was $15,480. Her husband is the higher wage earner and began receiving his own benefits at his FRA. Taking her benefits early made economic sense for Beverly because when she reaches her FRA, she’ll be eligible to switch to receiving spousal benefits, which will be one half of what her husband receives, a higher amount than her own reduced benefit. At that point, an income cap will also no longer apply to Beverly’s earnings, if she continues to work and her earnings situation improves.

Let’s reconsider Bill’s example. Some financial advisors recommend that someone in Bill’s situation first consider all the 401(k)s, IRAs, investment income, and any other economic sources they might have to fund those couple of years until full retirement age rather than file early. For every year you don’t take your Social Security benefits from age 62 to your FRA, and even until age 70, you could get a return that equals as much as $100,000 or more if you don’t file early.

QUOTATION

“If you or your spouse are in reasonably good health and you can afford to, wait to collect your payment for as long as you can. Yet, three quarters of Americans do the very opposite, filing for benefits within two months of retiring.”

—From “Time is money: How waiting to collect Social Security can boost your benefit” by Merrill Edge®/Bank of America Corporation

Considerations If You’re Still Working

If you’re still working, you have to consider your income and the fact that you’re continuing to contribute to Social Security through FICA, which will also increase your monthly benefit once you claim it.

Consider this: once you leave a good-paying job, returning to work at something that pays as well when you’re older is going to be extremely difficult. So you might want to hold on to the job you’ve got as long as possible.

But what if your job is physically or emotionally demanding? Let’s say you’re a construction worker or you work on an oil rig. Are you going to be able to, or even want to, perform that job at age 62, especially if you don’t qualify for disability? Under those conditions, it might make sense to start collecting your retirement benefits early.

There’s another factor that those who file early have to consider: the cap on their annual income.

Annual Income Caps

Many people are not aware that there’s a cap on the amount of income they can earn when they file for Social Security early. In 2014, the income limit for someone already receiving Social Security benefits is $15,480. For every $2 you earn over that limit, you have to pay back $1. That means if you earned $23,480, or $8,000 over the limit, you would have your benefits reduced by $4,000. If your normal benefits would have been $9,600 for the year, you would receive only $5,600.

Things change in the year you’re supposed to reach full retirement age. The income cap for that year dramatically rises. Let’s say in November of 2014 you reach your FRA of 66. At the start of that year, you only have to deduct $1 for every $3 earned over a much higher income cap of $41,400.

CAUTION

For some, having an earnings cap could unconsciously or even consciously limit your ability to earn more money even though you could use the extra income. But, according to the Social Security administration, “… these benefit reductions are not truly lost. Your benefit will be increased at your full retirement age to account for benefits withheld due to earlier earnings.”

There’s a special rule for the first year you claim retirement benefits. This was established because some people will retire at some point during the year and may have already earned more than the earnings cap. Under this first year rule, your Social Security check will not be reduced for any whole month you’re retired even if prior earnings that year were above the cap.

For example, let’s say you retire at age 62 on October 30, 2014. Up to that point, you earned $45,000. Starting in November, you decide to take a part-time job that pays $500 a month. So even though your earnings for the year far exceed the annual cap of $15,480 (or $1,290 per month) you will still receive your regular monthly retirement benefit checks for November and December because your part-time job paid less than the monthly cap of $1,290. However, the amount will be reduced due to early filing, and the regular annual cap will apply starting January 2015.

If you’re receiving retirement benefits before your FRA and are self-employed, things are a little different. The SSA looks at how much work you do in your business. If you work more than 15 hours a month and are self-employed, the government may not consider you to be retired.

Determining Your Break-Even Point

By now you know that when you take Social Security before reaching your full retirement age, you’ll be reducing your monthly check. That reduction amounts to about 8 percent for every year you receive benefits before you reach full retirement age. And that’s the amount you’re going to be getting for the rest of your life (except for the very minimal COLA adjustments for inflation) unless you stop your benefits and repay what you’ve received up to that point. If you do that, you can re-apply for benefits at a later date.

Let’s say you start taking Social Security at age 62. You will receive about 25 percent less than if you had waited until your FRA of 66, or 33 percent less if your FRA is 67.

Still, receiving less each month could be better than waiting four more years, when you consider how long it will take to reach your break-even point.

DEFINITION

The break-even point is a specific age, based on taking retirement benefits at age 62, at your full retirement age, or at age 70. For example, the break-even point between collecting at 62 and at full retirement age is the age at which you will have received the same amount of benefits from either choice (so you will break even).

According to the SSA, someone who receives $750 a month at 62 would instead have received $1,000 a month if they had waited to begin claiming their benefits at a full retirement age of 66. So by starting retirement as early as possible, you would actually earn $3,000 less per year. But by the time you reach age 66, you would have received $36,000 in benefits. It will take you another 12 years, to age 78, to make up that difference.

Therefore, age 78 becomes your break-even age if you began receiving benefits at age 62. If you’re expecting to live a lot longer than that, you should probably wait to take your benefits because they’ll be a lot higher. The longer you live, the more money you’re going to need down the road, especially if medical bills start to pile up and if you don’t have “gap insurance” to cover the 20 percent that Medicare does not cover. However, if you have a family history of a shorter life expectancy of only 60 or 70, it might make sense for you to start your benefits earlier.

Spousal Privileges

Keep in mind that taking Social Security early will also reduce the amount of benefits your spouse can receive under spousal benefits or as a survivor if you die first.

Here’s an example shared by Michael Turner, MBA, Managing Director of Charlotte, North Carolina–based Franklin Chase Wealth Management. Turner helped one of his clients understand how taking Social Security benefits early would impact his wife’s future spousal benefits:

“About a year ago, I met with a client to discuss retirement plans. He felt it was wise to file for Social Security at age 62. His rationale was the earlier he got the benefit, although reduced, it would result in more money over the long haul. I asked him how he felt taking benefits early would impact his wife. She is seven years younger than him and since he was the major breadwinner, she would receive his benefit upon his death. He didn’t feel it would be a large impact. I was able to illustrate to him that impact: if he died at age 77, his wife would receive about $10,000 a year less by him taking Social Security at age 62 as opposed to at age 66 [his full retirement age]. If he waited until age 69, it grew to about $20,000 a year less. He went to the Social Security Administration the next day to cancel his submission for benefit!”

What Are Spousal Benefits?

When it comes to Social Security spousal benefits, they apply to three categories of spouses: a current spouse, an ex-spouse (in the case of divorce), and a widowed spouse.

If you’re collecting a spousal benefit before you reach full retirement age, your monthly benefit check will remain at that reduced level for the rest of your life. And if your spouse also took his or her Social Security early, your spousal benefit will be cut even more.

In order to avoid this, many married couples use different strategies and coordinate the timing on when they begin collecting Social Security.

However, if your finances demand that both spouses file as soon as possible, just be aware of the consequences of filing early.

WORTH NOTING

Because Section 3 of the Defense of Marriage Act (DOMA) was declared unconstitutional on June 25, 2013, by the Supreme Court, Social Security can now consider same-sex couples for eligibility for spousal benefits. For more information, go to ssa.gov.

How to Qualify

Not every ex-spouse or widow qualifies for spousal benefits. If you are divorced, you’ll need to have been married for at least 10 years and must currently be unmarried. However, it doesn’t matter if your ex-spouse has remarried or not, only you. The only other qualification is that you must be at least 62 years of age to file.

Widows or widowers, on the other hand, can begin receiving survivor benefits as early as age 60. Also, a widow or widower only needs to have been married for nine months. If you’re caring for a disabled child or a child under the age of 16 who is also your ex-spouse’s child, you may be eligible for more benefits.

According to the SSA, the amount a widow or widower will receive is based on four criteria:

1. The amount the deceased spouse would have received at their full retirement age
2. Whether the deceased spouse had begun collecting benefits
3. Whether the deceased spouse had reached their full retirement age before dying
4. Whether the surviving spouse has reached their full retirement age

If your deceased spouse had started receiving benefits before they reached their full retirement age, you will receive at least 82.5 percent of what they would have received at full retirement age, even if they started collecting benefits at age 62. The rule was put into place to protect surviving spouses from having a lower income for the rest of their lives.

If the deceased spouse died before they had begun receiving Social Security benefits, the widow or widower is eligible to receive 100 percent of what the deceased spouse would have received at their full retirement age. For example, if your spouse died at age 65 but still hadn’t collected any benefits, you would receive what he or she would have received at their full retirement age even though their death preceded it.

Benefits for a widowed ex-spouse are similar to a widowed current spouse, except that you would have needed to have been married for at least 10 years and to be currently unmarried.

TIP

Keep in mind that you can take a spousal benefit while letting your own retirement benefit continue to grow.

File and Suspend Strategy

If you take Social Security early, you’ll also lose the opportunity to use the file and suspend strategy for your spouse, which is only available to those who file when they reach their full retirement age.

Here’s how it works. You file your Social Security claim when you reach your full retirement age, but then you suspend receiving any benefits. Why would you do that, you ask?

Well, the main answer is to allow your spouse to apply for the spousal benefit so she receives 50 percent of your full retirement age benefit. This works whether your wife was a stay-at-home mom or if she was a low wage earner for most of her working life. It even works if your spouse earned a salary similar to yours, because she can take the spousal benefit and delay applying for her own Social Security until later as well, allowing both spouses to get a larger monthly benefit check for delaying collecting the benefit.

QUOTATION

“You can get a ‘do-over’ where the Social Security Administration permits you to repay all benefits received and make a new claim in the future. But you can only do this once and it must be done prior to receiving 12 months of benefits.”

—Michael Turner, Management Director, Franklin Chase Wealth Management

The Least You Need to Know

• The earliest age at which you can start receiving Social Security benefits is 62.
• If you take benefits before reaching your full retirement age, your benefits will be reduced by a certain percentage for every year before your full retirement age.
• Taking retirement as early as possible might make sense if you need the money or if you don’t expect to live a long and healthy life.
• There are income caps you need to know about if you take early retirement benefits and still plan to keep working. The income cap in 2015 is $15,720. If you exceed that, for every $2 you earn, Social Security will hold back $1 in benefits. During your full retirement age year, the income cap rises to $41,880. Once you reach your full retirement age, there is no income cap.
• You will not be eligible for the file and suspend strategy for your spouse if you take retirement benefits early.