Most Americans approaching their retirement years probably know the main downside to receiving Social Security benefits at age 62. It's the steep financial penalty. Your benefits could be slashed by 30% by taking Social Security at the earliest age possible.
However, Social Security's early retirement penalty isn't the only financial drawback to consider. There are also two other hidden "penalties" for claiming Social Security at 62 that many Americans don't think about.
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Another less visible benefit cut
The Social Security Administration (SSA) does a good job explaining the early retirement penalty associated with receiving benefits at age 62 or any other time prior to your full retirement age. But the agency doesn't mention another less visible benefit cut very much that can impact many Americans.
To understand this less publicized benefit reduction, we first have to understand how your Social Security retirement benefits are calculated. It's a relatively complicated formula, but the most important thing to know is that SSA uses the 35 years where you had the highest earnings.
If you begin collecting Social Security retirement benefits at age 62, SSA must use your earnings from your 20s and/or early 30s in its benefit calculation. If you wait until 67 to receive retirement benefits, your earnings from the five previous years can be included in the calculation instead.
Most people make less during the early years of their careers than in their later years. Taking Social Security retirement benefits at 62, therefore, can result in a hidden benefit cut. Granted, this other benefit cut isn't a penalty per se. However, it can nonetheless function as a de facto penalty for early retirement.
Footing the health insurance bill
The amount of income you receive during retirement isn't the only thing that determines your standard of living. You must also factor in your expenses. The cost of health insurance can be especially expensive for seniors.
If you retire at age 62, you'll have to foot the bill for health insurance entirely on your own unless your former employer subsidizes insurance for retirees. This could result in a significant reduction in how much money you have to spend on other items.
Some might decide to work at least part-time after 62 to make more money to help cover those health insurance costs. However, there's a catch with doing so. SSA will reduce your benefits by $1 for every $2 you make above a specified limit ($22,320 in 2024). Your benefits will be reduced by $1 for every $3 you make above a higher limit ($59,520 in 2024) during the year you reach your full retirement age. Sure, you'll begin to get the foregone benefits back once you hit your FRA. That won't help you, though, in paying the bills before then.
Again, this isn't really a penalty for retiring early, but it definitely can feel like one. Waiting just three years beyond age 62 can make a big difference because you'll be eligible for Medicare at 65.
More than money to consider
As we've seen, there are several ways that your Social Security benefits can be lower as a result of retiring at 62. Of course, seniors must consider more than money in deciding when to retire.
However, it's important to consider the financial implications of collecting Social Security benefits at 62. And those implications go beyond just the early retirement penalty.
