You can begin drawing your Social Security benefits as early as age 62, but if you do, prepare to get far less in income per month than if you waited. Social Security punishes those who claim early by permanently reducing their benefit amount, but it handsomely rewards those who delay their benefits. The difference between the two payment amounts is significant enough that more Americans are considering holding off on claiming their benefits, especially since delaying can help guarantee financial security for a spouse.

Claiming early is costly

You'll only pocket 100% of your Social Security benefit if you claim at full retirement age, which varies between age 66 and age 67 for people born in or after 1954. If you claim Social Security 36 months or less prior to attaining your full retirement age, your benefit is cut by 5/9 of 1% for each month. If you claim more than 36 months prior to full retirement age, it's further reduced by 5/12 of 1% per month for each additional month.

A senior couple walking on a street.

IMAGE SOURCE: GETTY IMAGES.

This means that someone with a full retirement age of 67 who claims Social Security at age 62 will have their full retirement benefit lowered by 30%. That's a stiff penalty. But it gets worse.

Social Security also subjects you to its annual earnings limit if you claim early. That limit caps how much money you can earn from working while receiving Social Security; if you exceed the cap, Social Security will automatically withhold some of your payments.

Specifically, you can only earn up to $17,640 in 2019 without triggering withholding. If you earn more than that amount, then $1 will be held back for every $2 over the limit. A separate rule applies for the year you turn full retirement age. In the year you turn full retirement age, you can earn up to $46,920 in the months prior to your birthday. Earn more than that and Social Security will hold back $1 for every $3 above the limit.

The money that's withheld goes back into your Social Security record, so it increases your payment after you attain full retirement age. Nevertheless, if you plan to continue working while collecting Social Security, the cap could result in a much smaller Social Security check then you were imagining.

A waiting windfall

You can significantly increase your monthly Social Security income simply by delaying your benefits as long as possible. That's because Social Security issues delayed retirement credits for every month you hold off, up to age 70, and those credits increase your benefit amount by two-thirds of 1% per month delayed.

That works out to an 8% increase for every year you wait, so if your full retirement age is 67 and you delay your benefits until 70, you'll pocket 24% more money per month thanks to your patience. The difference is even more significant when it's compared to age 62 benefits.

For example, if Mary's full retirement age is 67, her benefit at that age is $1,000 per month, and she claims at age 62, she'll only receive $700 per month. Alternatively, if she waits until age 70, she'll receive $1,240 per month, or 77% more than she'd collect at age 62. And that difference is before any possible reductions to her age 62 benefit if she fails the earnings limit test.

Waiting to claim until age 70 also gives Mary an opportunity to significantly boost her lifetime Social Security benefits. As long as she lives into her 80s, she'll receive more in lifetime benefits than if she claimed early, despite the fact she'll have forgone 8 years of monthly checks by delaying.

A chart showing breakeven levels at various claiming ages.

AUTHOR'S CHART.

There's another important reason to wait

Social Security accounts for nearly half of married couples' retirement income, and the death of a spouse can significantly reduce the surviving spouse's household income if they were both receiving benefits. You see, survivors can only receive their own benefit or their deceased spouse's benefit, whichever is bigger.

Since the surviving spouse can collect 100% of their deceased spouse's benefit, including delayed retirement credits, a decision by the higher-income earner to wait can result in the surviving spouse getting the most possible from Social Security, which can help them maintain financial security when they need it most.

 

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