Social Security – Essential Tidbits on Early Benefits

We normally estimate that we need the same pre-retirement spending budget plus taxes to meet minimum retirement cash flow. Since Social Security was created to be a safety net, it only covers at most 40% of needed retirement cash flow. It is for this reason that additional savings are required to support retirement lifestyle cash flow.

The most important aspect of Social Security is that it is a lifetime benefit that is inflation adjusted and therefore holds a very unique place in any retirement plan and yet I find that it is often undervalued. Misunderstandings and short-term thinking can result in poor use of this very powerful resource.

More than a third of American workers claim Social Security benefits at 62, which is the earliest entitlement age, and also when they will receive the least benefit. This is referred to as early filing. With early filing the new lower-than-expected benefits are locked in for the remainder of one’s life. To highlight the difference, consider a person who at full retirement age of 67 would receive a benefit of $2,291 per month for life. If instead they file at age 62, their monthly benefit would be reduced to $1,487. This amounts to $9,648 less annually for life (or $17,844 instead of $27,492 each year), a significant decrease in retirement cash flow.

Claiming early Social Security benefits can be further reduced if you continue to work between ages 62 and your full retirement age. Early Social Security benefits will be dramatically reduced — up to a dollar for every $2 in earned income if your earnings exceed annual limits (usually the limits are around $19K of earnings though it changes each year).

There is a breakeven point for those thinking to file early. If, for some reason, you expect to die early and without a dependent spouse, then considering early Social Security benefits should be part of your planning.
Finally, many early Social Security claimants assume that Social Security is not taxed. In fact, taxation of Social Security benefits isn’t determined by a person’s age, but instead by income level. For example, if a married couple files jointly, and their income is above $44,000, then they will pay taxes on 85% of their Social Security benefits. On the other hand, if they earn less than that amount, they only pay tax on 50% of their Social Security benefits.

Always consider each available resource fully (including social security) to create the best support for your ideal retirement.

Edi Alvarez, CFP®