The Social Security program has been paying out benefits to millions of retired workers for more than 75 years; and it's a pretty good thing, too, because according to the Center on Budget and Policy Priorities, Social Security income has lowered the poverty rate of elderly adults to just 8.5% from what would be an estimated 40.5% without Social Security benefits.
However, what you'll ultimately receive in Social Security benefits depends on a trio of factors. First, the length of your work history matters, since the Social Security Administration (SSA) averages in your 35 highest-earning years. Secondly, your annual income is important, since higher wages over those 35 years can lead to higher benefit payments, up to a defined monthly maximum of $2,687 in 2017. Finally, your age when you file for benefits is perhaps of the utmost importance, because it could mean taking a reduction from your expected full retirement age benefit or netting a larger-than-expected payout.
For seniors signing up for Social Security, everything revolves around your full retirement age, or FRA. A person's FRA is a fluid number based on birth year that signifies when that person is entitled to receive 100% of his or her calculated monthly benefit. In the simplest terms possible, if you sign up to receive benefits before hitting your FRA (which will be 66 years and 2 months in 2017), you'll receive less than 100% of what your specific benefit would have been had you waited until your FRA. This reduction could be as much as 30% for people born in 1960 and later who enroll immediately upon turning 62. Conversely, sign up after your FRA date, and you'll get a bonus of as much as 32% on top of your full retirement benefit amount.
Here's why filing early if you have little saved is a mistake
Social Security income is of particular importance to seniors who have little to no savings for retirement. Without much saved, some seniors could lean very heavily on the program during their golden years. According to Gallup, nearly 60% of all current retirees already count on Social Security to provide at least half of their monthly income.
The temptation for seniors and pre-retirees with little or nothing saved is to enroll for Social Security benefits as soon as eligible to begin bringing in monthly income. But doing so could prove to be a big mistake, for two big reasons.
The biggest concern with filing early if you have very little saved is that it's going to lock you into a lifetime of reduced payments. In theory, if you don't have much saved and are a healthy individual, you should instead be trying to work for as long as possible in an effort to save money, pay your monthly expenses with your wages, and allow your Social Security benefit to grow at approximately 8% per month.
There's a significant difference in monthly income between accepting a 25% to 30% reduction from your FRA benefit and waiting to claim at age 70 when your payout is perhaps 24% to 32% higher than it is at your FRA. Netting a larger payout could make it easier to meet your monthly expenses during your golden years, whereas filing early could mean living on a very tight budget for the remainder of your life, or perhaps struggling to make ends meet.
"Double-dipping" may not help you
The other issue with filing early for benefits, especially if you're still working, is that your expectation of "double-dipping" may not come true. In other words, enrolling in Social Security while having a part-time or full-time job at age 62 could result in having the SSA withhold some, or all, of your benefits.
If you enroll in Social Security before hitting your FRA, the SSA can withhold $1 in benefits for every $2 you earn above and beyond a certain threshold. In 2017, this threshold is just $16,920 a year, or $1,410 a month. If you'll hit your FRA in 2017 but have filed early, the SSA can withhold $1 in benefits for every $3 you earn above $44,880. Though it's possible you could net a few extra bucks each month from filing early, it's also likely with such a low threshold of $16,920 that a good chunk of your double-dip will be withheld by the SSA.
Now here's the good news: Money withheld isn't money lost. You'll get every cent of your withheld benefit back after hitting your FRA in the form of a higher monthly benefit. However (and you can probably see where I'm going with this), it would have made more sense to wait to enroll in the first place if you're just going to wind up finishing the year well over the retirement earnings test exempt amount.
Obviously, not every situation is ideal. If you absolutely can't find work for an extended period of time, or you're dealing with a long-term health issue that could shorten your lifespan, then claiming early regardless of the size of your nest egg could be the smart decision. But, an otherwise healthy individual signing up early for Social Security benefits with little to nothing saved could be a regrettable decision.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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