Early Retirement Social Security Benefits

Aparna Iyer Sep 30, 2018
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Claiming early retirement Social Security is not a very good idea. Here we explain to you why you should avoid opting for early retirement benefits.
Social Security benefits, that are determined on the basis of earnings, can be broadly classified as retirement, disability, dependents, and survivors benefits.

Social Security Benefits

Retirement Benefits

People who have reached the age of 62 and have worked in a non-governmental job for at least 10 years, are eligible for Social Security retirement benefits provided their services do not come under the category of non-covered employment. Non-covered employment refers to services that are not covered under the Unemployment Insurance Law.
The earnings of non-covered employees is not taxable, thus, they are not entitled to unemployment benefits. The amount of Social Security retirement benefits are calculated on the basis of 35 years of income, when a person's earnings were maximum.
The chosen 35 years of earnings are adjusted for inflation and the average of the indexed incomes gives the benchmark for the monthly Social Security retirement benefits. In case a person has worked for less than 35 years, the indexed income for the years, when the person was not employed, is taken as zero.

Disability Benefits

Social Security disability benefits are available to people who have not attained retirement age, but have met the requirements for receiving Social Security and are disabled according to the Social Security program's medical guidelines. Generally, the amount of disability benefits equal the full retirement benefit.
These benefits can be classified as Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI). Age is no constraint for claiming Social Security disability benefits.

Dependent Benefits

The spouse, who may or may not be financially dependent, and the minor or disabled children of a retired or disabled worker, who receives Social Security benefits, are entitled to Social Security dependent benefits.

Survivors Benefits

The surviving spouse and minor or disabled children of a worker, who qualifies for Social Security retirement or disability benefits, are entitled to receive Social Security benefits on the basis of the income of the deceased employee.

Benefits of Social Security when Retiring Early

These issues are associated to availing early retirement Social Security benefits.

Eligible individuals can claim benefits at the age of 62 by filing claims three months before the 62nd birthday. However, waiting till one reaches the full retirement age or claiming benefits after full retirement age (FRA) will lead to increase in the amount of benefits.
For people born in the year 1960 and later, the FRA is 67. For people born between 1938 and 1960, the FRA varies between 65 and 67. Although one can claim benefits on reaching the age of 62, one would end up receiving around 20% to 30% less than the amount that one could have received had one waited till the full retirement age.
This is because the Social Security Administration encourages people to wait as long as possible. One can claim 100% of the benefits on reaching the FRA. People are also encouraged to wait past full retirement age, preferably until they attain the age of 70, by giving them incentives in the form of increased benefits.
A person, who waits past the full retirement age and claims Social Security at the age of 70, can hope to receive 108% of the benefits for each year that he/she delays, until age 70, as delayed retirement credit.
People whose earning exceed Social Security Administration's retirement earnings limit, will lose more for availing early retirement benefits.  For instance, in 2018, the annual earnings limit as decided is $17,040. That means in 2018 you could earn up to $17,040 and continue to receive all your Social Security benefits.
This is an increase from the 2017 limit of $16,920. People, earning more than $17,040, will lose $1 for every $2 of income exceeding the limit, assuming they have not reached FRA.
Once people reach the FRA, regardless of their annual income, Social Security benefits are received in full.
The filing status (married and filing jointly, unmarried, or married and filing separately) and the modified adjusted gross income (MAGI) decide the taxes levied on Social Security benefits. They are taxable if one gets income from other sources, apart from Social Security benefits, making the modified adjusted gross income more than the base amount.
Paying taxes on Social Security benefits may further reduce the benefits received by people who are still employed, and are claiming retirement benefits despite not having reached the full retirement age.
Since Social Security is calculated on the basis of 35 years of earnings that are adjusted for inflation, people who have worked for less than 35 years have a decided disadvantage since the indexed income for the remaining years is taken as zero.
This, in turn, would reduce the monthly Social Security retirement benefits. Such people may benefit by putting in a few more years of work provided they are healthy and can manage without Social Security payments.
In short, though availing early retirement benefits are possible, it is highly recommended to wait till the FRA before availing the same.