You can choose to collect Social Security benefits as early as age 62, and millions of Americans do just that -- but filing for Social Security retirement benefits as early as possible will result in your monthly payments being reduced by 25% to 30% from your full retirement benefit calculation.
Here's what you need to know about how your Social Security benefit is calculated, the effects of filing at age 62, and how work can affect your benefits.
Calculating your primary insurance amount
Your primary insurance amount refers to the amount of your monthly Social Security benefit if you start collecting at your normal, or full, retirement age.
In a nutshell, your primary insurance amount takes an inflation-indexed average of your highest 35 years of earnings, up to each year's maximum Social Security taxable income. Once this amount has been determined, a formula is applied to your monthly average. As of 2016, the benefit-determining formula is:
- 90% of the first $856
- 32% of the amount greater than $856 and up to $5,157
- 15% of the amount greater than $5,157
This is how your first-year benefit is determined. In subsequent years, you will receive a cost-of-living adjustment (COLA) to compensate for inflation.
The effect of early retirement
Retiring before your normal, or full, retirement age has the effect of permanently reducing your retirement benefit, so it's important to know how this works.
First of all, the reduction depends on your normal retirement age, which is 66 for those reaching retirement age now, and is about to gradually increase to 67. Your normal retirement age depends on your birth year, and I'll include a full list below.
As far as the benefit reduction goes, there are two guidelines you need to know:
- Your benefit will be reduced by six and two-thirds percent per year you claim benefits early, up to three years before your full retirement age. On a monthly basis, the reduction rate translates to five-ninths of a percent.
- Beyond three years early, your retirement benefits will be further reduced at a rate of five percent per year, or five-twelfths of a percent per month.
So, these reduction rates have different effects depending on your full retirement age. Here's a table that can help you determine your full retirement age and the effect of starting benefits at age 62.
|
If you were born in... |
Your full retirement age is... |
Reduction % for starting benefits at age 62 |
|---|---|---|
|
1954 or earlier |
66 years |
25% |
|
1955 |
66 years, 2 months |
25.83% |
|
1956 |
66 years, 4 months |
26.66% |
|
1957 |
66 years, 6 months |
27.5% |
|
1958 |
66 years, 8 months |
28.33% |
|
1959 |
66 years, 10 months |
29.17% |
|
1960 |
67 years |
30% |
For example, if you were born in 1956 and your primary insurance amount is $1,500, your retirement benefit would be reduced by 26.66% if you file as soon as possible, which would result in a monthly benefit of $1,100.
You can estimate your primary insurance amount and the effect of early retirement by creating an account on www.ssa.gov and viewing your latest Social Security statement. Or, you can get a quick estimate of your (and your spouse's) Social Security benefits for age 62 and any other theoretical retirement age with this calculator.
Do you still work? Your benefit could be reduced even further
Another factor to consider is whether you're still working when you file for Social Security benefits at age 62. Before you reach full retirement age, your earnings can reduce or take away your benefits entirely.
As of 2016, if you file for Social Security at 62, the first $15,720 you earn from working will have no effect on your benefits. Beyond that threshold, however, your benefits will be reduced by $1 for every $2 in excess earnings.
Now, it's important to understand that there's a potential positive later on that offsets the immediate reduction in benefits. If your benefit is reduced because of your earnings, you'll be treated later on as if you had waited longer to claim your benefits. That will result in slightly higher benefit checks down the road. Here's a complete discussion of how the Social Security earnings test works, which can tell you what you need to know if you plan to work after you file for benefits.
Early Social Security isn't the best idea for everyone
Before deciding to file for Social Security at 62, it's important to understand exactly what this will do to your retirement benefits for the rest of your life. Once you know how much you can expect to receive, you can weigh the pros and cons and make the best decision for yourself and your family.
