As of November 2022, the average retired worker was bringing home a little over $20,000 annually in Social Security income. Although that's not an exorbitant amount of money, it's a sum deemed necessary by nearly 90% of current retirees to make ends meet.

Because Social Security income is so vital to the financial well-being of most Americans as they age, there's arguably no decision more important than choosing when to begin taking your benefit. This decision can wildly impact what you'll receive on a monthly basis (and over your lifetime) from the program, as well as affect your loved ones.

A pair of glasses, a pen, and a calculator set atop a Social Security benefits application.

Image source: Getty Images.

About 60% of retired workers begin receiving their Social Security check between ages 62 and 65. By comparison, only around a sixth of retired workers claim their benefit between age 67 and 70 -- i.e., at or after full retirement age

For some individuals and couples, an early filing makes perfect sense. But if you're thinking about taking your Social Security benefit early, you should be aware that there are three ways you can be penalized.

1. Your monthly benefit will be permanently reduced

If you choose to begin receiving a Social Security check prior to reaching your full retirement age, you can expect your monthly benefit to be permanently reduced. The magnitude of that reduction can be as much as 30% for persons born in 1960 or later who begin receiving their retired worker benefit at age 62.

As you can see from the table below, your full retirement benefit could be as low as 70% of what you'd receive monthly at full retirement age, or in some cases as much as 32% higher than what you'd have netted at full retirement age. To net this top-tier monthly payout, you'd need to be born between 1943 and 1954 and willing to wait until age 70 to begin receiving your payout.

Birth Year Age 62 Age 63 Age 64 Age 65 Age 66 Age 67 Age 68 Age 69 Age 70
1943-1954 75% 80% 86.7% 93.3% 100% 108% 116% 124% 132%
1955 74.2% 79.2% 85.6% 92.2% 98.9% 106.7% 114.7% 122.7% 130.7%
1956 73.3% 78.3% 84.4% 91.1% 97.8% 105.3% 113.3% 121.3% 129.3%
1957 72.5% 77.5% 83.3% 90% 96.7% 104% 112% 120% 128%
1958 71.7% 76.7% 82.2% 88.9% 95.6% 102.7% 110.7% 118.7% 126.7%
1959 70.8% 75.8% 81.1% 87.8% 94.4% 101.3% 109.3% 117.3% 125.3%
1960 or later 70% 75% 80% 86.7% 93.3% 100% 108% 116% 124%

Data source: Social Security Administration. 

Percentages are one thing. It's an entirely different beast to examine what a permanent reduction to Social Security benefits for an early claimant might look like in the dollar column. If you arbitrarily assume that the average retirement payout for retired workers of $1,677.52 in November 2022 is the full retirement age benefit, an age 62 filing for someone born in 1960 or later would reduce this monthly Social Security check by $503.26.  This works out to a more than $6,000 per year reduction for as long as you receive a Social Security benefit -- and I'm not even factoring in cost-of-living adjustments.

2. The retirement earnings test can lead to benefit withholding

The second way early filers can be penalized is through the retirement earnings test. The "test" allows the Social Security Administration (SSA) to withhold some or all of a retired workers' benefits if they surpass predetermined income thresholds. In other words, if you work and choose to claim benefits before reaching your full retirement age, this could apply to you.

For example, early claimants who won't reach their full retirement age in 2023 are allowed to generate up to $21,240 in earned income (wages and salary, but not investment income), or $1,770 per month, before the SSA can begin withholding benefits. But for every $2 in earned income above this preset threshold, the SSA will withhold $1 in benefits. 

The withholding thresholds are a bit different if you've claimed benefits early but will reach your full retirement age in the upcoming year. If this is the case, early filers can earn up to $56,520 ($4,710 per month) before withholding kicks in.

A couple of things to take note of here. First, the retirement earnings test is no longer applicable once you've reached your full retirement age, regardless of when you began taking your Social Security check.

The other important point is that withheld benefits aren't lost. The SSA returns those benefits in the form of a higher monthly payout after you've reached full retirement age.

Two people embracing one another.

Image source: Getty Images.

3. An early filing can put your loved ones on shakier financial footing

Whereas the previous two points demonstrate how the primary filer can lose Social Security income with an early claim, the third way the SSA can penalize early filers is all about taking income away from their immediate family.

For retired workers who have no spouse or children to care for, deciding when to receive their Social Security check is truly a personal decision. In other words, regardless of when a single retiree chooses to begin taking their benefit, that choice affects them, and them alone.

But for the millions of retirees who are married, or who have children, their claiming decision could have a tangible impact on what their spouse and/or young children can receive as a survivor benefit.

The SSA determines what a spouse and/or children can receive as a survivor benefit by examining what the deceased worker was receiving each month. If that worker chose to begin taking their payout before reaching their full retirement age, it'll ultimately reduce the survivor benefit available to the spouse and/or children. This can be especially problematic if the beneficiary who passes away was the high earner of the household.

Once again, claiming early does make sense in certain situations. Just be aware that Social Security incentivizes waiting and penalizes impatience.